More Stories

Informist, Monday, Oct. 14, 2024

 

By Shubham Rana

 

NEW DELHI – Monetary policy may not be determined by one data point, but the market certainly seems to have got plenty of food for thought from the September CPI data. Data released Monday showed headline retail inflation surged far more than expected in September to a nine-month high of 5.49% from 3.65% in August.

 

To be sure, a sharp increase in inflation was expected on account of an unfavourable base effect; even the Reserve Bank of India last week warned it was keen to first "see off the near-term hump in inflation before even considering the next move". Economists from outside the Indian central bank, having now seen what the Monetary Policy Committee is up against, are starting to change their views.

 

"The higher than expected September inflation further strengthens the case that RBI will need to remain on the cautious side. Even the next reading appears to be settling higher than 5%," Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said. Bhardwaj, who earlier expected a repo rate cut in December, now sees it only in 2025.

 

Last week, the MPC unanimously changed its policy stance to neutral from 'withdrawal of accommodation'. Most economists then had expected the MPC to follow through with a 25-basis-point rate cut at its next meeting in early December, with as many as 20 of the 25 economists polled by Informist being of that opinion. Things have changed.

 

According to ICRA Chief Economist Aditi Nayar, the September CPI figure has "appreciably dampened the possibility of the stance change in the October policy being followed up by a rate cut in the December meeting". "For a rate cut to be forthcoming in the December policy review, either the CPI inflation will need to flatten considerably below 5.0% in the next print or the GDP growth for Jul-Sept will need to significantly undershoot the MPC's expectations," Nayar said in a note.

 

Signs of the former are few. Economists currently see CPI inflation above 5% in October on account of continued pressure from food prices. Latest data from the Department of Consumer Affairs shows food prices have risen in October from September, with prices of wheat, pulses, edible oils, and vegetables all up sequentially. Tomato prices, which fell 8.8% month-on-month in September, are 36.7% higher so far in October compared to last month. Onion prices have increased 5.7% from September.

 

"Food inflation remains a concern," Rajani Sinha, chief economist at CareEdge Ratings, said in a note. "Risks to food inflation have not fully abated completely and need monitoring. Factors such as uneven monsoon, pre-harvest rainfall, and an increase in global edible oil prices add to the risks to food inflation," Sinha added.

 

THE UNAMBIGUOUS RBI

The MPC may have changed its stance last week, but if the last few years have shown us one thing, it is that the stance means little and offers no guarantees. Even as it moved into neutral gear, the committee warned that it remains "unambiguously focused on a durable alignment of inflation with the target, while supporting growth".

 

CPI inflation only moved below the RBI's medium-term target of 4% in July after a gap of nearly five years. There is no way the RBI will risk squandering all the effort taken to arrive at this point for just a 25-bps rate cut, especially with core CPI inflation also hitting an eight-month high of 3.5% in September.

 

"Five months of gradual increase in core inflation could be a precursor to demand revival. Precisely for this reason the MPC is on wait and watch mode. The future monetary policy action will be more data dependent," Devendra Kumar Pant, chief economist at India Ratings and Research, said.

 

The RBI has not been providing forward guidance about its actions for a reason and the September CPI inflation number only underscores the importance of the central bank having the "flexibility and optionality" to move as evolving conditions demand it to.  End

 

Edited by Ashish Shirke

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.