RBI Lowers FY25 Inflation Forecast by Quarter, Holds key rate steady
It was announced on Friday that the RBI’s Monetary Policy Committee (MPC) would lower its inflation estimate for the first, second, and fourth quarters of Financial Year 2024-25 (FY25). This means that inflation will be lower than the central bank’s goal of 4% in the second quarter, at 3.8%.
The exchange rate was held at 6.5% by the rate-setting group at its first meeting of the fiscal year. With a majority of five votes, the monetary policy stance of “withdrawal of accommodation” was kept. Five of the six members voted in favor of the rate decision.
It was earlier thought that inflation would be 5% in the first quarter (April–June), but the RBI now thinks it will be 4.9%. In the fourth quarter (January–March), it is expected to be 4.5%, down from the 4.7% that was first predicted. The prediction for inflation in FY25 stayed the same at 4.5%.
“As we expected, the MPC policy took into account how global stories change, even though things have stayed good at home.” Madhavi Arora, lead economist at Emkay Global Financial Services, said, “This suggests that when it’s necessary, the goal of financial stability may even come before managing inflation.”
“We have said for a long time that the RBI’s policy has been tied to that of the Fed [US Federal Reserve], especially over the last two years, even though its official goal was to fight inflation.” This seems fair because things in the outside world have been changing quickly, which means that policymakers need to be able to adapt in order to keep the economy stable. “The changing global stories and policy prices, along with the short-term issue of too many INR/bonds, could make it hard for the RBI to find a balance in its policy preferences,” Arora said.
“Thus, we think the RBI’s tone will slowly tiptoe to ‘Gracklish’ from the usual ‘Hawk-Dove’ signaling, indicating a vague stance and little clear direction going forward,” she said.
“The big problem was inflation.” It looks like the elephant is now leaving the room and going to the forest. In this monetary policy speech, RBI governor Shaktikanta Das said, “We want the elephant to go to the forest and stay there.”
He said that the overall rate of inflation has gone down since December, when it was highest. But persistent pressures on food prices have been slowing down the process of deflation, making it harder for inflation to finally fall to the goal level.