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Next week’s monetary policy meeting comes amid a sharp spike in vegetable prices, a spatially uneven monsoon, and a divergent global monetary policy cycle. As seasonal inflationary pressures gather momentum, the Reserve
Bank of India is expected to prolong the pause, thereby maintaining a status quo in both policy rates and stance.

Monsoon Plays a Spoilsport, With No New Major Headwinds to Growth Despite the recent surge in inflation, which can be attributed to transitory factors such as a significant increase in vegetable prices, there are underlying forces that could sustain elevated inflation levels in the coming months. By the end of July, the eastern Gangetic plains still experienced significant rainfall deficits, while parts of western India, including Rajasthan and Gujarat, witnessed an excess surplus of rainfall.

The current progress of the monsoon is not only spatially skewed but is expected to have temporal variations as well. The monsoon’s progress witnessed a turnaround shift from a 10% deficit in June to a 5% surplus in July. However, recent reports from IMD predict a below-normal rainfall (less than 94% of LPA) in August. The erratic monsoon has resulted in lower sowing of certain kharif crops like pulses which could also contribute to growing inflationary pressures in the coming months. Apart from vagaries arising from monsoon and agriculture-related issues, a recent spike in international crude oil prices (11% since June) due to supply cuts from OPEC countries could also put upward pressure on inflation. Factoring for the transient near-term risks from the weather-related factors, we have increased our projection of inflation for FY24 to 5.3% from 5.1% earlier. The RBI is also expected to revise its inflation projection higher.

Having said that, contracting WPI along with softness in many global commodity prices will provide some cushion to the rising inflationary pressures with a lag. Expected moderation in the core inflation will also provide some comfort. Amid these evolving conditions, MPC members will likely take a wait-and-watch approach to better understand the nature of inflationary pressures before announcing a change in policy rate and stance. RBI’s MPC is expected to remain cautious given the lingering inflationary concerns.

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