ADB raises inflation forecast, pessimistic about quick rate cuts

Citing elevated food prices, the Asian Development Bank (ADB) on Wednesday raised its projection for India’s average retail inflation in 2024-25 marginally to 4.7% from 4.6% estimated earlier, even as it retained its GDP growth hopes for the country at 7% for this year and 7.2% in 2025-26.

While some agencies expect the Reserve Bank of India to start slashing interest rates as early as October, the ADB is not as sanguine. Monetary policy is expected to become less restrictive but not as soon as expected earlier, it emphasised.

“Elevated food price inflation and the concern that it may spill over into the prices of other goods and services has delayed the adoption of a more accommodative monetary policy. However, if improved supply succeeds in moderating food price increases, the central bank will likely start lowering its policy rates in 2024-25, which will improve prospects for bank credit expansion,” it concluded.

“Food prices have continued to be elevated despite expectations of higher output and increased imports of key commodities… In India, the 2024-25 inflation forecast is revised up slightly to accommodate higher food prices, while the forecast for 2025-26 is maintained in the expectation that core inflation will rise as food inflation moderates,” the Bank said in its latest Asia Development Outlook report.

ADB averred that the near-term risks to India’s growth outlook are balanced, and although GDP growth slowed to 6.7% in the April to June 2024 quarter, it is expected to accelerate in the coming quarters with improvement in agriculture and a largely robust outlook for industry and services.

The bank noted that Industrial growth in India has slowed somewhat, as rising input prices reduced margins in the manufacturing sector, offsetting gains in mining and construction. However, it expects the La Niña effects to help countries like India record substantial increases in agricultural output, particularly in crops like rice, wheat, and sugarcane.

“Geopolitical shocks may affect global supply chains and commodity prices, while weather shocks may pose risks to agricultural output. Another downside risk this year is the failure of government to meet its capital expenditure target,” the bank said. It pointed to the slow public expenditure implementation in the first quarter, and said central government capex now needs to grow 39% in the rest of the fiscal year to meet the target, “which may be difficult”.

Published - September 25, 2024 08:12 pm IST