The elegant “Elephant” is still in the room.

The monetary policy statement on 5^th April 2024 has highlighted that "Two years ago, around this time, when CPI inflation had peaked at 7.8 per cent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis. " In other words, it is essential, in the best interest of the economy, that CPI inflation continues to moderate and aligns to the target on a durable basis. Now, to what extent the statement that the “elephant is returning towards forest” and accordingly, the CPI would move towards its target rate 4 per cent could be relied upon?

According to the Monetary Policy Report April 2024, “Headline CPI inflation” moderated to 5.3 per cent in October 2023-February 2024 from an average of 5.5 per cent in H1:2023-24. Sporadic food price shocks continued to impart significant volatility to the inflation trajectory, with headline inflation rising sharply in November and December 2023 due to a spike in vegetable prices.

The major perpetrator, therefore, remains recurring food price shocks that is hindering the ongoing disinflation process and monetary policy needed to remain actively disinflationary to ensure anchoring of inflation expectations and maximum transmission.Erratic supply side shocks from adverse climate events and their impact on agricultural production as also geo-political tensions and spillovers to trade and commodity markets add uncertainties to the outlook. Adverse weather events and lingering geopolitical conflicts remain the majorthreats.The global food price outlook is also subject to significant upside risks from the historically unprecedented heat wave sweeping across the globe. The India Meteorological Department (IMD) has forecast above-normal temperatures and heatwave days during the summer season. Climate change has increased the frequency and ferocity of weather shocks.

The RBI’s baseline assumptions for projections for crude oil (Indian basket) remains at US$ 85 per barrel during 2024-25. According to the Petroleum Planning & Analysis Cell (PPAC), Crude Oil Indian Basket as on 04.04.2024 is $ 89.84/bb. Whether the crude oil could hit $100/barrel is an open question.

Core inflation (i.e., CPI excluding food and fuel) has, however, been on a progressively declining path. In February 2024, it dropped to 3.4 per cent, among the lowest prints in the current CPI series (2012=100), driven by both core goods and services components. The cumulative ratehike remains in aggregate at 250 basis points (bps) during May 2022-February.In fact, SMEs have felt the heat of the so-called “higher for longer”. In recent times, automative sector has expressed fear about retail sales could be hit adversely due to higher real rates, especially entry-level vehicles.

RBI’s survey reveals that, services sector companies expect higher input cost pressures and growth in selling prices in Q1:2024-25, while infrastructure firms expect higher input cost pressures but lower growth in selling prices.In the PMI surveys, manufacturing firms reported increased input cost pressures but slower output price increases in March 2024. Services firms reported higher input and output prices, with a marked increase in the rate of inflation in March 2024. The projections of CPI inflation of   4.5 per cent in 2024-25 – 4.9 percent in Q1, 3.8 per cent in Q2, 4.6 per cent in Q3 and4.5 per cent in Q4 could be jeopardised if the persistence food price shock does not subside and/or geopolitical conflicts continue. A disturbing trend is that while core inflation is declining and supporting the efforts at moving towards the “target rate” the food inflation, supply chain disruptions due to exogenous factors are prolonging the rate softening expectations.