More Stories

Informist, Monday, Jan. 13, 2025

 

By Shubham Rana

 

NEW DELHI – A fall in headline retail inflation to a four-month low of 5.22% in December may not be enough for the Reserve Bank of India's Monetary Policy Committee to lower interest rates just yet.

 

Coming in largely along expected lines in December--an Informist poll had predicted retail prices would rise 5.3?ter posting an increase of 5.48% in November--thanks to a fall in food prices, particularly those of vegetables, CPI inflation in the last quarter of 2024 has averaged 5.6%, marginally lower than the RBI's forecast of 5.7%.

 

And while inflation is seen falling sharply in January--according to rating agency ICRA, it may ease to as much as 4.5-4.7%--and GDP growth has surprised on the downside at a four-year low of 6.4% for 2024-25 (Apr-Mar), the central bank's rate-setting panel will have to weigh additional factors at its Feb. 5-7 meeting. According to HDFC Bank's economists, the RBI could choose to be more cautious given global uncertainties and emphasise the importance of 'timing' the reduction in the policy repo rate that has stayed unchanged at 6.50% for almost two years.

 

"With rising expectation of a pause by the US Federal Reserve in the January policy and increasing depreciation pressures on the rupee, the RBI could be nudged towards delaying rate cuts," HDFC Bank economists Sakshi Gupta and Mayank Kumar Jha said in a report Monday.

 

The US central bank will announce its interest rate decision on Jan. 29.

 

RUPEE'S TROUBLES

After a prolonged period of RBI-engineered stability, the Indian rupee has weakened sharply against the US dollar in recent months, with the central bank seemingly allowing the exchange rate to find its level at a time of heightened outflows and a two-decade low interest rate differential with the US.

 

With Donald Trump set to assume charge as the president of the US next week, the Indian currency has not gone unscathed, falling 1.1% against the dollar so far in January, closing at a record low of 86.59 a dollar on Monday after posting the biggest one-day fall in nearly two years. To put this recent decline into context, the rupee fell just 1% in the 12 months ended October.

 

"While the projection for inflation for Jan-Mar of RBI is 4.5%, the present depreciation in the rupee will be an additional concern as this can lead to higher imported inflation especially on oil products," Bank of Baroda Chief Economist Madan Sabnavis said. "It does look like that there could be a status quo on repo rate under these conditions unless things change drastically on forex front, which is unlikely," Sabnavis added.

 

To be sure, the RBI has previously asserted that the exchange rate is not a consideration when it comes to setting interest rates. However, the MPC cannot ignore situations where currency movements start influencing domestic inflation. The RBI's foreign exchange reserves have slumped over $70 billion in less than four months to a 10-month low of $634.59 billion in the week ended Jan. 3 as the central bank continues to defend the rupee.

 

BUDGET MATH

Another key determinant of growth and inflation over the next year will be the Union Budget for FY26, which will be presented by Finance Minister Nirmala Sitharaman on Feb. 1. Economists expect Sitharaman to continue focussing on fiscal consolidation and see the fiscal deficit for the next financial year being set around 4.5% of GDP, as per the medium-term roadmap. Capital expenditure is expected to rise again, although the pace of increase may decline further.

 

According to Paras Jasrai, senior economic analyst at India Ratings and Research, the "conviction of fiscal arithmetic" will weigh on the MPC's decision. While Jasrai thinks numbers at present are positive from a monetary policy perspective, the "odds are tilted in favour of a pause in policy rates one more time".

 

Adding to the uncertainty caused by the various forces outside of inflation and growth will be the change in the composition of the MPC itself.

 

The Feb. 5-7 meeting will be the first with Governor Sanjay Malhotra as the committee's chair. A second new member will be Deputy Governor Michael Patra's successor, with the term of the longest-serving MPC member ending on Tuesday. The three external members on the MPC are relatively new themselves, having joined only in October. This makes the post-Budget meeting of the committee more difficult to predict than usual.  End

 

US$1 = INR 86.58

 

With inputs from Pratiksha

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. 2025. All rights reserved.