Informist, Tuesday, Nov. 12, 2024

By Shubham Rana

NEW DELHI – The first 6%-plus CPI inflation number since August 2023 has not only wiped out expectations of the Reserve Bank of India cutting interest rates in December but has also raised questions about whether they will be lowered in what remains of 2024-25 (Apr-Mar).

Data released earlier Tuesday showed India's headline retail inflation rate jumped to a 14-month high of 6.21% in October on the back of higher food prices. At 6.21%, CPI inflation was above consensus expectations of 5.9% as per an Informist poll. It has now risen more than 250 basis points in the space of just two months after the September print too had surprised on the upside, surging to 5.49% from 3.65% in August. But the October figure seems to be the final nail in the coffin for hopes of a December repo rate cut, with economists quick to start looking at 2025.

While most economists now expect the Monetary Policy Committee to lower the repo rate by 25 bps to 6.25% in February, some warned that the wait for rate cuts may get extended to nearly five years when the committee meets in early April. The MPC had last cut the repo rate in May 2020.

"It now appears highly unlikely that the panel (MPC) will reduce interest rates in the December meeting as we had been expecting," Shilan Shah, deputy chief emerging markets economist at Capital Economics, said in a note. "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," Shah added.

The latest monthly gauge of price rise backs up RBI Governor Shaktikanta Das' warnings over the last month that it would be premature and risky to lower interest rates at the current juncture. Last week, the central bank also said it should not be assumed that the MPC would follow its decision to loosen the stance of monetary policy to neutral from withdrawal of accommodation on Oct. 9 with a repo rate cut at its next meeting on Dec. 6. Markets are definitely not assuming any such thing now.

However, the September and October CPI data are not the only reason for the shift in expectations, with economists also predicting inflation may remain high in November too and exceed the RBI's forecast of 4.8% for the last quarter of 2024 by around 70 bps. According to Paras Jasrai, senior economic analyst at India Ratings and Research, retail inflation is expected to be around the 6% mark in November as well.

Data on 22 food items compiled by the Department of Consumer Affairs showed prices have risen 0.8% so far in November compared to October, when they had surged 4.9%.

If average inflation in Oct-Dec is significantly higher than the RBI's projection, the central bank's full-year forecast of 4.5% could also be under serious threat. Madhavi Arora, chief economist at Emkay Global Financial Services, sees inflation averaging around 4.85% in FY25. She is not alone, with analysts from IDBI Bank raising their full-year inflation forecast on Tuesday by 20 bps to 4.9%.

While expectations of a rate cut at the MPC's December meeting are near-zero now, GDP data for Jul-Sept--scheduled to be released on Nov. 29--could still change things, with economists expecting growth in the second quarter of FY25 to undershoot the RBI's forecast of 7.0%. "Our experimental nowcast GDP for Q2FY25 post IIP data continues to be below 5%, which is lower than RBI's forecast of 7.0% (although our forecast is 6.0-6.5%)," IDBI Bank analysts said in a note Tuesday after the release of Index of Industrial Production, which showed industrial growth returned to positive territory in September from August's 22-month low of (-)0.1%.

A status quo on rates for the 11th meeting in a row could make next month's policy decision a non-event. However, markets will closely monitor any new commentary from the central bank. The problem, though, is that it could be the last one for Governor Das, whose term ends on Dec. 9, with Deputy Governor Michael Patra also set to retire in mid-January. Two new MPC members at the February meeting could change the contours of India's monetary policy at a time when the macroeconomic outlook is already complex. End

Edited by Ashish Shirke

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