BoB Projects May Inflation Rate at 2.7%
Anticipation Grows Ahead of RBI’s Monetary Policy Committee Meeting
As the Reserve Bank of India (RBI) gears up for its Monetary Policy Committee (MPC) announcement, Bank of Baroda forecasts that the Consumer Price Index (CPI) inflation for May 2025 will be 2.7%, a notable decline from April’s 3.16%. This drop is attributed to the deflationary trend in the Essential Commodities Index and favorable conditions surrounding food and energy prices. Market expectations are leaning toward an additional 25 basis points rate cut today, following recent reductions.
May CPI Inflation Suggests Downward Trend
In the lead-up to the 55th MPC meeting, Bank of Baroda indicated that CPI inflation might decrease to 2.7% in May, a significant drop from the 3.16% recorded in April. This projection follows the Essential Commodities Index experiencing deflation for the first time since January 2019. The bank also noted that food inflation is providing a broader sense of comfort, supported by favorable global food and energy prices. Q1 FY26 boasts a favorable base, which could further contribute to subdued inflationary pressures.
Supply Dynamics and Price Trends
Bank of Baroda highlighted that the prices of volatile items such as tomatoes, onions, and potatoes (commonly referred to as TOP) have shown resilience due to improved production. In May 2025, cumulative arrivals of these items increased by 26.4% compared to a decline of -16.1% in May 2024, on a year-on-year basis. Additionally, there remains a notable gap between retail and wholesale prices of tomatoes and potatoes, suggesting that reduced wholesale prices are likely to reflect in retail pricing soon.
Impact of Gold Prices on Inflation
The bank mentioned that supply conditions are favorable for a lower inflation reading in the near future, with a decline in gold prices playing a crucial role. Specifically, international gold prices fell by 2.9% month-over-month in May 2025, in contrast to a 7.9% increase in April 2025. During its last meeting, the MPC projected CPI inflation for the current fiscal year at 4%, forecasting quarterly figures of 3.6% for Q1, 3.9% for Q2, 3.8% for Q3, and 4.4% for Q4. After unanimously deciding to cut the policy rate by 25 basis points in April, bringing it to 6%, the MPC has reduced rates by a total of 50 basis points in this cycle. Today, markets are anticipating that the RBI will announce yet another 25 basis points rate cut.
Ongoing Vigilance Required on Food Inflation
Bank of Baroda cautioned that while certain aspects of food inflation appear stable, vigilance is necessary. Data from the World Bank has shown recent increases in metal prices, particularly for aluminum, copper, and zinc, primarily due to heightened demand amidst tariff uncertainties. Although domestic demand conditions have generally been supportive, factors such as an improved monsoon and higher minimum support prices (MSP) are encouraging. Nevertheless, some pressure on core inflation could still arise.
Core Inflation Trends Observation
Despite a gradual increase in core inflation, which reached an 18-month high of 4.21% in April, a recent RBI bulletin emphasized that elevated gold prices have been a key contributing factor to this trend. The inflation rate for gold saw an increase of over 30% in the three months leading up to April, which has kept inflation levels in categories related to “personal care and effects” substantially high, thus impacting core inflation metrics.
