Consumer inflation is projected to cool to 5.0% in fiscal 2024 from an estimated 6.8% in fiscal 2023, for three reasons. One, we expect fuel inflation to reduce to 3% from a high of over 10% in the current fiscal, because of expected easing of crude oil prices as global growth slows down. Two, slowing domestic growth will ease core inflation from very sticky levels of over 6% this year. But the decline in core inflation will be limited (to 5.5% from 6.0%) as pressures from input costs, despite easing, are expected to remain elevated compared with pre-pandemic levels.

Firms, in order to protect their margins, will continue to pass on input costs to end consumer as much as they can. Plus, services inflation will continue to exert pressure as rotation of consumption demand from goods to services continues in the next fiscal. Contact intensive services have been the last to recover, with 'fast and furious' growth in the premium segment playing out. And third, food inflation, which has a high weightage in the Consumer Price Index (CPI), and has been driving headline inflation in the past, is projected to moderate to slightly below 5.0%. Incidentally, though, food inflation, which has been acutely volatile, carries upside risks.

The risk to our inflation forecast is tilted upwards, largely because of climate-related factors affecting agriculture output. The ongoing heatwave and freak weather events continue to threaten rabi cereal production. Additionally, after three years of La Nina, El Niño is expected to play out in 2023. The India Meteorological Department will issue a clearer guidance on that in April. Over the past two decades, we have observed a very close association between El Niño and scanty rains in the monsoon season. So, fingers crossed on that.

What does all this mean for the upcoming monetary policy? Earlier, we expected the repo rate to peak at 6.5% and the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to go into pause mode. But given aggressive stance of systemically important central banks such as the United States (US) Federal Reserve and the European Central Bank (ECB), and the stubbornness of the domestic inflation print, MPC might plump for another rate hike of 25 basis points (bps) during its April policy review.

To be sure, the recent turmoil in the banking sector in the US and Europe has not changed the monetary stance of major central banks, thus far. The ECB has already raised interest rates by 50 bps at its most recent policy meet, and the Fed by 25 bps.