As inflation softens, will RBI cut rates?

RBI Governor Shaktikanta Das' term comes to a close this December and new external members are to be appointed ahead of the RBI meeting in October (Photo: Reuters)

The election season is nearly underway as polling begins in J&K on September 18, Haryana goes to polls on October 5, followed by Maharashtra and Jharkhand in the coming months. This, while prices of onions and potatoes are still off the charts - onion prices were up 65.75 percent and potato prices saw 77.96 percent surge this August. Clearly, food inflation continues to be a sticky point for the government and the Reserve Bank of India (RBI).

RBI Governor Shaktikanta Das, post-monetary policy committee (MPC) meet in August, had said that "first and foremost is the fact that our target is the headline inflation wherein food inflation has a weight of about 46 percent. With this high share of food in the consumption basket, food inflation pressures cannot be ignored”. In an interview to CNBC International, Governor Das said that the decision on interest rate moderation will be based on long term inflation trajectory and not monthly data. The MPC, headed by Governor Das, will be meeting from October 7-9.

The Wholesale Price Index data for August shows WPI inflation softening to four-month low in August at 1.31 percent, largely driven by lower commodity prices with crude prices softening. WTI Crude was below $70 per barrel on September 17. However, Aditi Nayar, Chief Economist at ICRA, explained that a lower WPI will take time to translate into a lower consumer price index. A lower inflation number is driven largely by lower commodity prices globally and lower crude prices. But she is wary about the possibility of these two factors continuing. Geopolitical dynamics, slowdown in China and the US presidential election all add to the uncertainty. On lower crude prices, Nayar added, “Enjoy it while it lasts.” She doesn’t expect crude prices to stay low for long.

Uncertainties around India's rate cut

Besides the unpredictability on which way crude prices could go, domestically, RBI Governor’s term comes to a close this December and new external members are to be appointed ahead of the RBI meeting in October. These factors are compounding the uncertainties around rate cuts. Could the RBI Governor, in the scenario that he doesn’t get an extension, reduce rates on his last MPC?

DK Joshi, Chief Economist at Crisil, added that in case the highly anticipated meeting of the Federal Open Market Committee of the United States Federal Reserve ends with a rate cut on September 18, it would be the first since March 2020. If there is a 50 basis point cut, as is expected, it could create room for the RBI to cut rates. "If there is a 50 basis point by the Fed, then there is space with RBI to cut rates in October," said Joshi.

But economists are wary of saying that with certainty as they wait on getting clarity on the new Governor at RBI and the new MPC members. The new members are expected to be appointed before the October meeting.