Inflation in India to Stay Around 5% in FY 2024-25: SBI Report

India's consumer price inflation is anticipated to hover around 5% for the financial year 2024-25, barring the months of September and October, according to a research report by the State Bank of India (SBI).

The report emphasized that inflation remains a significant concern for the Reserve Bank of India (RBI). June 2024 saw the Consumer Price Index (CPI) inflation rise to 5.08%, mainly driven by increased food and beverage prices.

'CPI inflation is expected to remain below or close to 5.0% in the remaining months, except for Sep'24 and Oct'24,' stated the report. It highlighted the role of the monsoon season in influencing food inflation, noting that while the current monsoon has shown a satisfactory surplus, excess rainfall could result in crop losses, thereby aggravating food prices.

Managing inflation expectations is critical for the RBI, especially given its dual mandate of supporting economic growth while maintaining price stability. 'With the monsoon progressing satisfactorily with a 2% surplus to date and area coverage under Kharif crops showing a 2.9% year-on-year increase, we expect inflation to remain within the RBI's target in FY25. However, should La Nina events lead to excessive rainfall, crop damage and higher food prices could follow,' the report added.

In the face of the evolving economic landscape, the report indicated that the RBI might persist with its strategy of withdrawing accommodation to curb inflationary pressures. Yet, policy transmission challenges arise as deposit rates exhibit downward rigidity, despite a decreasing weighted average lending rate (WALR), complicating the RBI's monetary policy implementation efforts.

'Although banks are actively seeking deposits to support credit growth, recent data from the RBI shows a reduction in the WALR on fresh rupee loans by 11 basis points from the start of the year (from 9.43% in January 2024 to 9.32% in June 2024),' the report noted. Looking ahead, the RBI's decisions will be influenced by both domestic and global economic conditions, including the potential for a US recession and geopolitical tensions, which could impact India's inflation dynamics.

Therefore, the RBI's monetary policy must remain adaptable and responsive to external factors while striving to achieve inflation targets and promote sustainable economic growth.

(With inputs from agencies.)