The RBI Bulletin Predicts That High Gold Prices Will Drive Core Inflation

RBI Bulletin Highlights Influence of Elevated Gold Prices on Core Inflation

The Reserve Bank of India (RBI) bulletin has pointed to soaring gold prices as a significant factor contributing to the increase in core inflation, which reached an 18-month peak of 4.21% in April. This trend could potentially lead to reductions in the repo rate during meetings scheduled for June and August. Despite a relatively low headline Consumer Price Index (CPI) of 3.16%, the inflation driven by gold and risks associated with food prices due to weather changes remain highly relevant.

The year-on-year CPI increase plummeted to a 69-month low of 3.16% in April. While core inflation has recently shown a slight upward trend, the RBI’s article underlined that the persistence of high gold prices is influencing this pattern. As a result, the likelihood of consecutive cuts in the policy repo rate during the monetary policy reviews in June and August has increased. Furthermore, the inflation forecast for FY26, previously set at 4%, may be revised downward.

Core Inflation Trends Amid Gold Price Fluctuations

Core inflation, which excludes food and energy costs, continues to be significantly affected by heightened gold prices, according to a report on economic conditions. The article mentions that if the gold factor were excluded, underlying inflation pressures would also still appear subdued. It is noteworthy that these observations do not necessarily reflect the views of the RBI.

The decline in headline CPI inflation, which began in November 2024, has persisted through April 2025, marking the sixth consecutive month of diminishing figures. For the third month in a row, the headline value remained below the 4% target set by the RBI as part of its flexible inflation targeting strategy. However, it’s also pointed out that the global disinflation process appears to be stagnating at this stage. While headline inflation in advanced economies has steadily approached targets, core inflation has been more sluggish to decrease, particularly due to ongoing inflationary pressures in the services sector. Emerging market economies are witnessing a mixed but generally declining trend in inflation rates.

Outlook for India’s Retail Inflation and Agriculture Sector

India’s relatively low retail inflation is significantly influenced by a notable decrease in food prices. Additionally, a robust rabi harvest and increased planting for summer crops bode well for the agricultural sector, reducing concerns over potential supply issues in the food market in the months ahead.

On a global scale, commodity markets seem to be transitioning into a new phase. Several risks—stemming from trade dynamics, geopolitical factors, reduced demand, and weather-related disruptions—could trigger considerable volatility in commodity prices. Prices for energy and industrial metals have been on a downward trend, and forecasts suggest crude oil values may continue to decline through 2025 and 2026. With uncertainty surrounding overall demand conditions and a lack of supply shocks, global commodity prices might revert to levels not seen since 2020.

Concerns Over Weather Impacts on Vegetable Prices

An additional article raises concerns about India’s major role in vegetable production, highlighting that most of this output comes from small-scale and marginal farmers who lack effective safeguards against climate disruptions. Weather anomalies can disrupt the short-term supply of vegetables, leading to significant price volatility and food inflation.

In conclusion, the article notes: “Empirical findings indicate that weather anomalies are statistically significant, with both rainfall and temperature fluctuations intensifying pressures on vegetable prices in India. Furthermore, the increasing importance of temperature-related shocks and their immediate effects on prices underscore the urgent need for adopting temperature-resistant crop varieties. This adaptation can be bolstered by policy measures, such as the National Mission on High Yielding Seeds announced in the Union Budget for 2025-26.”