The Reserve Bank of India's Monetary Policy Committee (MPC) has kept its retail inflation forecast to 5.4% for the financial year ending March 2024. But not without a warning.

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"Headline inflation could remain high for a longer than estimated time," RBI governor Shaktikanta Das said. The sowing area for both oil seeds and pulses has reduced sharply, he warned. When the sowing area is reduced, the output of the crops is likely to be lower, and that may lead to higher prices.

The RBI's own estimates show that inflation may be 5.2%, even at the end of June 2024,. That's better than what it is now but much worse than ideal.

Household budgets in India have been significantly squeezed in recent months due to a spike in retail prices. More than a quarter of the total pinch came from the rise in vegetable prices, which carry a weight of 6% in the consumer price index.

RBI's warning of high retail inflation may dash hopes that consumer demand, particularly in rural areas, affecting everything from toothpastes to two wheelers, may improve. If the demand doesn't improve, it may affect stock prices for companies like Hindustan Unilever, Marico and ITC to Bajaj Auto and TVS.

It will also affect the sentiment of traders in the stock market. Interest rates are likely to remain high as long as price rise continues to be more than what the RBI likes. That leads to high borrowing costs and less liquidity in the market. That's bad for risk assets like stocks.

There was a bummer for those who hoped that RBI may ease its stance against inflation, as long as the inflation remains under 6%, which is the outer limit for the central bank's tolerance. "I say, emphatically, that RBI's target for inflation is 4%, and not 6%," Das said, That's as good as a line cast in stone.

First Published:Oct 6, 2023 10:22 AM IST