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Informist, Tuesday, Nov. 12, 2024

 

NEW DELHI – Economists are raising their inflation forecasts for the last quarter of 2024 significantly after India's headline retail inflation surprised on the upside for the second month in a row in October, with the Reserve Bank of India's projection of 4.8% for Oct-Dec seen being exceeded by at least half a percentage point.

 

Data released on Tuesday showed CPI inflation jumped to a 14-month high of 6.21% in October against expectations of 5.9% as per an Informist poll. This follows another substantial jump in September, when inflation rose to 5.49%. Compared wih August, inflation is now more than 250 basis points higher, first driven by an unfavourable base in September and then higher food prices in October.

 

While inflation may soften below the RBI's upper bound of 6% in November, "Oct-Dec CPI inflation is tracking higher at 5.5-5.6% compared to RBI's forecast of 4.8%, while full-year FY25 inflation is now tracking (around) 4.85% compared to RBI's forecast of 4.5%," said Madhavi Arora, Emkay Global Financial Services' chief economist.

 

IDBI Bank's research analysts have, meanwhile, raised their full-year inflation forecast to 4.9%, with retail prices seen rising 5.6% in Oct-Dec. ICRA Chief Economist Aditi Nayar, too, sees inflation overshooting the RBI's forecast by "at least 60-70 bps" in the current quarter.

 

"Double-digit food inflation after a gap of 14 months is certainly not good news for the monetary authority," said Paras Jasrai, senior economic analyst at India Ratings and Research, who expects inflation to surpass the central bank's projection by anywhere between 50 and 100 bps. "Barring health, services inflation increased and hardened to an 11-month high in October and has added to the problem of RBI," Jasrai added.

 

Food inflation in October surged to 10.87%, the highest since July 2023. Core inflation, on other hand, also rose to a 10-month high of 3.7%, which Jasrai said was suggestive of a pick-up in demand. To be sure, much of the increase in core inflation in October was due to higher prices of precious metals, with the indices for gold, silver, and 'other ornaments' items of the CPI basket rising 4.7%, 6.5%, and 3.8% month-on-month, respectively.

 

While the Monetary Policy Committee left the repo rate unchanged at 6.50% for the 10th meeting in a row on Oct. 9, it loosened its stance to neutral, sparking hopes of a rate cut on Dec. 6. However, the release of the September inflation number on Oct. 14, followed by warnings from Governor Shaktikanta Das that a rate cut at the current juncture would be premature and risky, led to markets dialling back their expectations. Rate cut calls are now being postponed even further.

 

"...it now appears highly unlikely that the panel (MPC) will reduce interest rates in the December meeting as we had been expecting," said Shilan Shah, Capital Economics' deputy chief emerging markets economist. "We now forecast the first 25 bps cut to the repo rate to materialise in April; it is only by then that there will be enough evidence of inflation falling back sustainably."  End

 

Reported by Siddharth Upasani

Edited by Akul Nishant Akhoury

 

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