A higher inflation print, coupled with higher industrial production, will provide support to the Reserve Bank of India to keep rates higher for longer, economists said on July 12.
“The RBI will be in no hurry to ease monetary policy given the headroom from robust growth in the backdrop of near term inflation risks,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.
Both inflation and industrial production surprised, with inflation rising above 5 percent for the first time in four months and industrial production soaring to a seven-month high of 5.9 percent in May compared to 5 percent in the previous month.
Economists contend that a lot rides on the food inflation trajectory in the coming months and even an October cut, which was earlier anticipated, hangs in balance.
“While the RBI has projected inflation to come down in Q2 to less than 4 percent, the monsoon progress will determine whether this is sustainable or not. RBI expects inflation to go back to 4.5 percent in the following quarters. Any rate action can be considered only in October and will be heavily data dependent,” said Madan Sabnavis, chief economist, Bank of Baroda.
In an interview with CNBC-TV18 earlier this week, RBI Governor Shaktikanta Das had hinted at interest rates staying higher for longer.
“The overall economic environment globally and in India is so uncertain to talk in terms of interest rate cut. Second thing is CPI headline inflation continues to be close to 5 percent… I think it is too early to talk on interest rate cut,” Das had noted.
The Reserve Bank of India’s monetary policy committee will likely keep the policy rate unchanged at 6.5 percent for the ninth consecutive time at its meeting from August 6-8.
The cooling off of the US inflation in June has increased the possibility of a rate cut by the Federal Reserve in September.
“Despite the likelihood of a Fed rate cut having increased for Sep'24, we don’t expect any monetary easing measures from RBI till Dec'24,” said Suman Chowdhury, chief economist, Acuité Ratings & Research.
Ind-Ra economists noted that the Budget will also play a role in deciding the direction of monetary policy in future.
“External risks emerging from ongoing geopolitical tensions need to be monitored, given the risk they can pose to supply chains and commodity prices,” said Rajani Sinha, chief economist, CareEdge.
Future inflation trajectory
On the inflation front, experts indicated that favourable base and possibility of good monsoons are likely to determine inflation in the coming months.
“The temporal and spatial distribution of monsoon and progress of Kharif sowing would be critical factors to monitor. A good monsoon is crucial for controlling food inflation and ensuring a successful Kharif harvest, especially given the current low reservoir levels,” said Sinha from CareEdge.
Kharif sowing until July 8 was up 14 percent from previous year, but down 2.1 percent from 2022 levels.
ICRA pointed out that inflation could fall to 2.5-3 percent in July, given prices had risen 7.4 percent in the previous year, but noted that concerns around excess rainfall could upend near-term outlook.
“A sustained spell of heavy rainfall can further push up perishable prices, which imbues caution into the near-term outlook,” said Aditi Nayar, chief economist, Icra.
“July-August inflation will benefit from favourable base effects, but the pullback will be shallower than previously anticipated on still elevated vegetables and telecom tariff hikes by local providers,” added Radhika Rao, senior economist, DBS Bank.
Vegetable inflation had risen to 29.4 percent in June from 27 percent in the previous month, with potatoes and onions recording over 50 percent inflation.
Can industrial output sustain growth?
“The high frequency indicators such as steel production, petroleum consumption, etc for the month of June 2024 suggest that barring primary goods the industrial activity has witnessed modest pickup post-election. However, it is too early to term this as industrial revival. Ind-Ra expects yoy growth of IIP to remain in the range of 5-6 percent in June 2024,” said Ind-Ra economists, Paras Jasrai and Sunil K Sinha.
There was silver lining for consumer goods as durable production rose 12.3 percent in May from a strong 10.2 percent expansion in April and consumer non-durables climbed back to expansion.
“Clearly, IIP growth is on a stable path, which bodes well for the economy. The post-harvest festival season will hold clue to revival of demand, especially rural,” said Madan Sabanvis chief economist, Bank of Baroda.
Economists noted that demand will also be contingent on food inflation.
“Consumption recovery faces headwinds from high food inflation,” said Sinha from CareEdge.
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