Informist, Friday, Apr 26, 2024

--Fin min official: See average headline inflation around 5.0% FY25

--Fin min official: Inflation below 4.5% in FY25 more ideal for econ

--Fin min official: Crude at $90/bbl hurtful, over $100 very painful

By Priyasmita Dutta and Sagar Sen

NEW DELHI – The Reserve Bank of India’s projections place average headline inflation in the current financial year started on Apr 1 not too far from the target rate of 4%, but an internal assessment by the finance ministry is relatively more pessimistic. The ministry expects inflation based on the Consumer Price Index to average at around 5.0% in 2024-25, 50 basis points higher than the central bank’s projection, a senior official from the finance ministry told Informist.

India's CPI inflation averaged 5.4% in 2023-24.

Although an average inflation of 5% would be within the RBI's tolerance band, the finance ministry would ideally like inflation to be below 4.5%, the official said. The RBI’s mandate is to keep inflation close to the target rate of 4%, within a band of plus or minus 200 bps.

"For 2024-25, inflation should be around 5%, but less than 4.5% is more ideal. That would be better," the official said.

Earlier in the month, the RBI retained its inflation forecast for the current year at 4.5%, but flagged uncertainty from food prices, as well as risks arising from a rise in crude oil prices, geopolitical tensions, and financial market volatility. The International Monetary Fund and the Asian Development Bank have both projected India's inflation for 2024-25 at 4.6%.

According to the official, even though risks to inflation have abated, the trajectory of CPI inflation will depend on many factors, especially crude oil prices. "We have to monitor how crude prices pan out this year. Any global development will impact it first," the official said.

"Crude prices above $90 per barrel are hurtful but beyond $100 is extremely painful for the economy," the official added. The Brent crude oil futures have traded in a range of $85-$92 per barrel so far in April.

The official's comments on high crude prices also come at a time when geopolitical tensions intensified after Iran accused Israel of killing its military commanders in an attack on the Iranian consulate in Syria. Last week, Israel fired missiles against Iran after Tehran launched over 300 missiles and drones towards Israel. The renewed tensions between Iran and Israel propelled Brent futures to a near six-month high of $92.2 on Apr 12. Oil futures have since eased to over $87 a barrel in the face of a subdued response from Iran, a major oil producer, and due to concerns over demand.

The RBI has assumed the Indian crude oil basket at $85 per barrel for its forecasts. According to the central bank’s assessment, a 10% rise in crude oil prices from the baseline could push up headline inflation by 30 bps and weaken GDP growth by around 15 bps.

A finance ministry report released on Thursday also flagged the inflation risk posed by high oil prices amid geopolitical tensions. "While a record rabi crop will help in moderating cereal prices, the increasing occurrence of weather shocks poses an upside risk to food prices. Geopolitical tensions and their effect on oil prices add to this risk," the finance ministry said in its Monthly Economic Review for March released on Thursday.

End

US$1 = 83.34 rupees

Edited by Saji George Titus

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