India's retail inflation cooled to a historic low of 0.25 percent in October driven down primarily by food prices and base effect. The food index remained negative, declining by more than 5 percent. It brought comfort to the overall headline numbers even though core inflation surged to 4.4 percent mainly due to higher gold prices. The benign inflation print also boosted chances of a rate cut in December.
RBI Governor Sanjay Malhotra noted in the October policy meeting that even though policy space has opened up for a rate cut on the back of moderation in inflation, the RBI could wait for the measures already taken to spur growth to play out.
"In view of these factors, even though there is policy space to further cut the policy rate, I feel this is not the opportune time for the same as it will not have the desirable impact," the governor said.
The recent slide in the rupee to record lows brings some unease to the inflation battle that has been successfully fought so far. Risks of imported inflation could rise if the rupee slide continues further.
However, crude oil prices remaining subdued owing to progress on the Russia-Ukraine peace efforts eases the pressure on India's import bill.
"With crude oil and many other commodity prices being relatively soft, the recent depreciation in the INR may not have a large impact on the WPI and CPI inflation in the near term," said Aditi Nayar, Chief Economist, ICRA.
The rupee plunged to record lows on Friday before the RBI intervened to contain the volatility.
The demand for dollars put pressure on the rupee amid heightened uncertainty on the external front. Some analysts see the rupee dropping below 90. That could be a challenge for India's external balance sheet at a time when the trade deficit is also inching up.
“It may be only a matter of time before USDINR pushes higher through 90, though we would expect the RBI to resume interventions to smooth any move lower in the rupee,” a Bloomberg report cited Barclays Plc strategists, including Mitul Kotecha, as saying.
India's combined trade deficit surged to $21.8 billion in October from $9.05 billion in the same period last year. The merchandise trade deficit ballooned to $41 billion, a steep rise on the back of slowing exports and rise in imports of gold and silver.
“On the back of a higher-than-expected trade deficit, net financial flows have been on the weaker side, thereby pressuring the rupee to depreciate while RBI had been containing the volatility,” the same Bloomberg report quoted Yes Bank economists including Indranil Pan as saying.
Eyes on GDP
Whether the RBI will go for a rate cut or not depends on India's growth trajectory. The Q2 GDP report card will come out in a few days. The GDP growth is expected to be more than 7%, according to a Moneycontrol poll of economists. This is above the RBI's projection of 7% for the quarter.
The GST rate cut that came into effect in September is likely to spur consumption, India's main growth driver, in the third and subsequent quarters. The RBI will closely track how the numbers shape up.
Along with the fiscal measures, the cumulative impact of the rate cuts so far will also play a role in propelling India's growth engine.
As the governor pointed out in the last policy, the central bank will likely opt for a wait-and-watch mode to ascertain the need for a rate cut.
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