India’s headline inflation could reach 4.5% in the second half of the fiscal year, helped by lower crude oil prices, although volatile food prices could pose a challenge, the central bank said in its monthly bulletin on Friday.
“Some of the vegetable price shocks have started to reverse, and if this continues and broadens, the persistence that characterised the food inflation path in the first quarter of 2024-25 could be behind us,” the Reserve Bank of India said.
India’s retail inflation was 3.65% in August, higher than July’s revised 3.60%, driven by soaring vegetable prices.
Food prices, which account for almost half of retail inflation, rose 5.66% in August, compared with a 5.42% increase the previous month.
The RBI is targeting 4% inflation with a tolerance margin of two percentage points on either side.
An unfavourable base effect could “haunt” September inflation numbers, the RBI said.
However, household consumption is expected to rise faster between July and September due to lower headline inflation, the RBI added.
The RBI, which kept its key interest rate unchanged for the ninth consecutive meeting in August, is expected to proceed cautiously in easing monetary policy.
Its next monetary policy meeting is scheduled for October 7-9.
The gap between bank credit and deposit growth is starting to narrow as lenders continue to rely heavily on certificates of deposit to meet funding needs, the central bank noted.
“Non-banking financial companies (NBFCs) are increasingly moving towards offshore bonds,” she added.
“Microfinance institutions are facing asset quality issues, which justifies a slowdown in the pace of loan growth.
NBFCs need to remain alert to the rapidly changing financial landscape and risks related to cybersecurity and climate risks, the RBI said in a separate bulletin.
It is the responsibility of NBFCs to proactively identify and manage risks and strengthen their insurance functions to ensure financial stability.
