India's Headline Inflation Expected to Cool to 4.5% in 2024-25: Economists

India's inflation expected to cool to 4.5% in 2024-25, easing pressure on RBI's monetary policy. However, real rates may remain high due to global factors, posing challenges for economic growth.

Dil Bar Irshad
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India's Headline Inflation Expected to Cool to 4.5% in 2024-25: Economists

India's Headline Inflation Expected to Cool to 4.5% in 2024-25: Economists

India's headline CPI inflation is expected to cool further to 4.5% in 2024-25 from a four-year low of 5.4% in 2023-24, according to an Informist poll of 17 economists. The projection is in line with the Reserve Bank of India's forecast, which expects CPI inflation to average 4.5% in 2024-25. Inflation is likely to ease due to a reduction in food inflation and well-behaved core inflation.

The economists expect retail inflation to remain above the central bank's medium-term target of 4%, except for the July-September quarter, similar to the RBI's projections. Food inflation is expected to moderate to 5.6% this year from 7.5% in 2023-24, depending on the southwest monsoon. Core inflation, which excludes food and fuel items, is expected to stay around the 4% mark this year, with a potential rise in October-March due to an unfavorable base effect.

Why this matters: The cooling of inflation in India has significant implications for the country's economic stability and growth prospects. Lower inflation rates can lead to increased consumer spending, improved business confidence, and a more favorable environment for investment. The RBI's monetary policy decisions, which aim to maintain price stability while supporting economic growth, will be influenced by the inflation trajectory.

According to a research report by Morgan Stanley, the Reserve Bank of India's Monetary Policy Committee may not cut the policy repo rate from 6.50% in the current financial year ending March 2025. The primary reasons cited are strong domestic growth and a delay in the US Federal Reserve's rate cut expectations. The report suggests that improving productivity growth, rising investment rate, and inflation tracking above the 4% target, along with a higher terminal Fed funds rate, warrant higher real rates.

With the RBI's forecast of CPI inflation averaging 4.5% in 2024-25, the real interest rate is expected to average 200 basis points in the financial year. The report also notes that external MPC members have spoken about high real rates as CPI inflation recedes closer to the RBI's 4% target, implying potential rate cuts of up to 100 basis points in 2024-25. However, the report suggests that the RBI may be cautious due to the strength of the dollar index and the higher terminal US Fed funds rate, which could increase the risk of volatile foreign portfolio investments if India's rate cuts don't match the timing or intensity in the US.

India's retail CPI inflation has been moderating since July 2023, falling to a 10-month low of 4.85% in March. The cooling inflation trend is expected to continue in the coming financial year, providing a favorable environment for economic growth and stability. However, the RBI will need to carefully manage monetary policy decisions, considering both domestic and global factors, to maintain price stability and support economic recovery.

Key Takeaways

  • India's CPI inflation expected to cool to 4.5% in 2024-25 from 5.4% in 2023-24.
  • Inflation to ease due to lower food inflation and stable core inflation around 4%.
  • RBI may not cut repo rate in 2024-25 due to strong growth, high US rates, and inflation above 4%.
  • Real interest rate expected to average 200 bps in 2024-25 as inflation nears 4% target.
  • RBI cautious on rate cuts due to strong dollar, higher US rates, and risk of volatile FPI flows.