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Informist, Thursday, Dec. 12, 2024

 

By Shubham Rana

 

NEW DELHI – The recent experience of the Indian economy has been such that data coming along expected lines would be welcomed. After a startling fall in GDP growth in Jul-Sept to 5.4% and more than a 250-basis-point increase in inflation in the space of just two months, the November CPI inflation declining largely as expected to 5.48% from 6.21% in October offers some breathing room to policymakers.

 

However, the November inflation data is only the first half of the ongoing monetary policy game and all eyes now will be on how prices fare in December, for that will be the latest print the new Reserve Bank of India Governor Sanjay Malhotra and his fellow members on the Monetary Policy Committee will have with them when they meet next on Feb. 5-7.

 

The fall in inflation in November was primarily due to a sequential decline in the prices of food items, particularly those of tomato, with vegetable inflation dropping to 29% from 42% in October. Clearly, vegetable inflation remains high--according to CareEdge Ratings, if vegetables are excluded, CPI inflation in November would have been 3.9%, lower than the RBI's medium-term target of 4.0%. And a further appreciable decline will be needed in December for the new-look MPC--RBI Deputy Governor Michael Patra is also set to exit the central bank in mid-January--to reduce interest rates in February.

 

WINTER DISINFLATION

Elevated food inflation has long been an obstacle for policymakers, so much so that top officials from the finance and the commerce ministries have publicly asked the RBI to ignore these prices while setting interest rates. While these calls have been dutifully ignored by the central bank, the onset of the usual winter food disinflation could finally provide easing space. Some economists see CPI inflation moderating further to around 5.0% in December considering the sequential moderation in food prices visible so far.

 

"In the coming weeks, we expect food prices to ease sequentially. Vegetable prices tend to come down in December when the kharif crop enters the market. A high base of last year will also help in lowering the reading, since vegetable prices missed their seasonal decline last year," said Dipti Deshpande, principal economist at CRISIL.

 

According to latest data from the Department of Consumer Affairs, onion and tomato prices are down 5.9% and 2.9%, respectively, from November so far in December, while those of potato are up 1.5%. In comparison, only tomato prices were down sequentially in November.

 

To be sure, a 5%-plus inflation in December does not cement a rate cut. Over Oct-Nov, inflation has averaged 5.8%. But even if it does not fall further in December, the RBI’s forecast of 5.7% for Oct-Dec will still be met.

 

But, as Paras Jasrai of India Ratings and Research points out, monetary policy is forward looking. “...if the inflation trajectory as laid out by the RBI in its December policy materialises and it remains around 4.0?yond 2QFY26 (Jul-Sept 2025) along with a convincing fiscal arithmetic of Union Budget FY26, the long-awaited rate cut may take place in February," Jasrai said.

 

ARITHMETIC AND UNCERTAINTIES

There could not have been a better time for Sanjay Malhotra to take charge as the governor, with his first meeting as the leader of the MPC just days after the presentation of the FY26 Budget. As the revenue secretary until early this week, he will know better than any RBI insider the government's plans for next year.

 

With the Centre well on its way to reducing its fiscal deficit to 4.9% of GDP this year, it will likely target cutting it further to at least 4.5% next year as per its roadmap. This would mean a further weakening of fiscal impulse.

 

The bond market has already seen raised bets of a repo rate cut in February following Malhotra's appointment, primarily due to the exit of Shaktikanta Das, who was increasingly seen as 'hawkish' by the time his six-year tenure came to an end. Malhotra's opening day address on Wednesday only added to these hopes, with the new central bank chief not even mentioning the word 'inflation', whether by design or accident.

 

What Malhotra did take note of was the global geopolitical tensions and political uncertainties around the world and the need for the RBI to be "alert and agile" to meet these challenges while maintaining policy continuity but without being "stuck to it". One uncertainty that will probably clear by Feb. 5 is the US’ trade policies, with Donald Trump set to take charge of the White House for a second time in January.

 

So will the MPC finally lower interest rates in February after having left it unchanged at 6.50% for the 11th consecutive meeting last week? According to Madhavi Arora, chief economist at Emkay Global Financial Services, while a rate cut cannot be ruled out, falling inflation "does not guarantee a deep, linear rate cut cycle".

 

"The policy trade-offs are getting acute with tricky and small window of conventional rate cuts as global dynamics turn more fluid. Besides, mounting FX (foreign exchange) pressures and increasing cost of FX intervention will need to be weighed before cutting rates deeply ahead," said Arora.  End

 

Edited by Akul Nishant Akhoury

 

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