RBI agrees to 'demand from some quarters,' unveils first-ever core inflation projection at 4.4% for FY27

The Reserve Bank of India (RBI) on Wednesday announced its projections for core inflation—the rise in prices after stripping out the impact of food and energy price changes—with governor Sanjay Malhotra saying this was a demand from some quarters.

“We are doing this for the first time as has been the demand from some quarters and going forward, we shall continue giving our projections for core inflation,” said Malhotra.

The RBI projected core inflation at 4.4% for FY27. Excluding precious metals, core inflation is even lower, indicating that underlying inflation pressures are expected to remain contained.

Malhotra said headline inflation remained below target in January-February—at 2.7% and 3.2%, respectively—with the food group recording inflation as against a deflation in the previous four months. He said inflation in fuel items was modest. Core inflation was at 3.7% and the underlying price pressures benign, as evident from the much lower core inflation excluding precious metals at 2.1%.

In a discussion paper in August, RBI had asked a set of questions. One of them was whether headline inflation or core inflation would best guide the conduct of monetary policy, given the evolving relative dynamics of food and core inflation and the continuing high weight of food in the consumer price basket.

The RBI said in the paper that headline inflation is favoured worldwide as a more representative measure of overall price conditions. Except for Uganda, all nations that target inflation look at headline inflation.

Malhotra told reporters that for the RBI, headline inflation is the target that should stay within a band. Under the flexible inflation targeting framework, the monetary policy committee needs to maintain inflation within the range of 2-6%.

"At the same time, the various components of inflation and where they are emanating from are also very important. So, that has been the consistent policy of the monetary policy committee," said Malhotra.

Food supply issues

The debate over whether core or headline inflation should be the benchmark has been around for some time. It was primarily around monetary policy’s handicap on food prices because they are caused by supply-side problems and not by demand, which can be controlled by interest rate changes.

Food now carries a 37% weight in the headline consumer price index or CPI basket —down from 46% in the previous inflation series. In July 2024, the Economic Survey for 2023-24 suggested excluding food prices from India’s inflation-targeting framework.

Malhotra said core inflation pressures remain muted, although supply chain dislocations and the risk of second-round effects render the future inflation trajectory uncertain. He said the monetary policy committee noted that geopolitical uncertainties have heightened significantly since the previous policy meeting.

“Headline inflation remains contained and below the target. However, upside risks to the inflation outlook, driven by increased energy price pressures and probable weather disturbances affecting food prices, have increased,” he said.