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Inflation Outlook FY26: Rahul Bajoria on the Factors Driving CPI Lower

The Indian economy is grappling with persistent inflationary pressures, a complex issue impacting everything from household budgets to the Reserve Bank of India's (RBI) monetary policy decisions. As we look towards Fiscal Year 2026 (FY26), understanding the potential drivers of lower Consumer Price Index (CPI) inflation is crucial. Leading economist Rahul Bajoria offers valuable insights into the key factors that could contribute to a decline in inflation next year. This analysis delves into the intricacies of India's inflation trajectory, examining factors ranging from global commodity prices to domestic supply-side improvements.

Understanding the Current Inflationary Landscape in India

Before exploring the future, it’s essential to understand the present. India's inflation rate, as measured by the CPI, has remained stubbornly high throughout much of 2023. Several factors contributed to this:

• Global Commodity Prices: The lingering impact of the Russia-Ukraine conflict, supply chain disruptions, and global energy price volatility continue to exert upward pressure on prices of essential commodities like food and fuel.
• Supply Chain Bottlenecks: While improving, supply chain issues stemming from the pandemic continue to impact the availability and pricing of various goods. This is particularly relevant for the agricultural sector and manufacturing industries.
• Domestic Demand: Robust domestic demand, fueled by pent-up consumption and government spending, has contributed to inflationary pressures.
• Monsoon Performance: The performance of the monsoon season significantly impacts agricultural output and food prices, a crucial component of the CPI basket. A weak monsoon can exacerbate food inflation.

These factors have presented a significant challenge to the RBI, which has been carefully managing monetary policy to control inflation while supporting economic growth. The RBI's inflation targeting framework sets a target of 4%, with a tolerance band of +/- 2%.

Rahul Bajoria's Perspective on Lower CPI in FY26

Rahul Bajoria, a prominent economist known for his insightful analysis of the Indian economy, suggests several factors could contribute to lower CPI inflation in FY26:

1. Base Effect: A Crucial Factor

One significant factor contributing to lower CPI in FY26 will be the base effect. The high inflation rates witnessed in the initial months of FY25 will serve as a high base for comparison. This means that even with relatively stable prices, year-on-year inflation numbers will appear lower due to this statistical effect. This is an important nuance to understand when interpreting inflation data.

2. Moderating Global Commodity Prices

Bajoria anticipates a gradual moderation in global commodity prices. This is linked to expectations of slowing global economic growth, which would typically reduce demand and put downward pressure on prices. Furthermore, increased global supply and potential easing of geopolitical tensions could also contribute to this trend. However, uncertainty remains in the global macroeconomic environment.

3. Improved Domestic Supply-Side Conditions

Increased domestic production and improved supply chain efficiency are critical to lowering inflation. Bajoria highlights the potential for increased agricultural output, contingent on a normal monsoon season. Investments in infrastructure and supply chain enhancements can also lead to improved efficiency and reduced bottlenecks, easing inflationary pressures.

4. RBI's Monetary Policy Stance

The RBI's continued focus on managing inflation, including potential further rate hikes or maintaining a higher repo rate for a sustained period, will play a crucial role. While rate hikes can curb inflation, they can also impact economic growth. The RBI's monetary policy will require a delicate balancing act.

5. Government Measures to Control Inflation

Government interventions, including policies aimed at ensuring food security and regulating essential commodity prices, can contribute to controlling inflation. Targeted measures to address specific inflationary pressures, such as subsidies or stock releases, can also have a significant impact.

Risks and Uncertainties

Despite the optimistic outlook, several risks and uncertainties could affect the CPI trajectory:

• Geopolitical Instability: Continued global geopolitical uncertainty and potential disruptions to the global supply chain pose a significant threat.
• Unpredictable Monsoon: The variability of the Indian monsoon remains a major risk, as poor rainfall can drastically impact agricultural output and food prices.
• Unexpected Supply Shocks: Unforeseen global supply chain disruptions or domestic supply shocks could reignite inflationary pressures.

Conclusion: A Cautiously Optimistic Outlook

While Rahul Bajoria’s analysis points towards a potential decline in CPI inflation in FY26, it's crucial to approach this outlook with caution. Several factors could either reinforce or undermine this prediction. A sustained focus on improving domestic supply-side conditions, strategic government interventions, and prudent monetary policy by the RBI will be vital in achieving lower inflation and maintaining macroeconomic stability. The interplay of global and domestic factors will continue to shape India's inflation story in the coming years. Continued monitoring of these factors, including global commodity prices, monsoon performance, and RBI policy decisions, is essential for accurate forecasting. The coming months will provide valuable data points to further refine these predictions. Understanding this complex interplay is key for businesses, investors, and policymakers alike.