Inflation cooling in line with expectations, but no rate cut soon, say experts

Although headline inflation stayed within the RBI’s tolerance range of 2-6 percent for the second month in a row, it has been above the medium-term target of 4 percent for 49 consecutive months.

India’s headline retail inflation rate eased to a five-month low in October, broadly in line with market expectations, but a repo rate cut still remains distant, experts said. Additionally, uncertainty lingers in food prices, especially for kharif crops, they said.

"The fall in inflation was on expected lines and we do not see the central bank looking at cutting rates soon as the inflation numbers remain within its tolerance range," said Madan Sabnavis, chief economist at Bank of Baroda.

Aditi Nayar, chief economist at ICRA, said the Reserve Bank of India's Monetary Policy Committee will maintain a hawkish tone in December.

Also read: Inflation cools off beyond expectations but uncertainty lingers, say experts

"We expect the MPC to maintain a hawkish tone amidst a status quo on the rates and stance in its upcoming policy meeting. We see the earliest likelihood of a rate cut in August 2024, when a shallow rate cut cycle of 50-75 bps could commence," Nayar said.

Inflation as measured by the Consumer Price Index eased to 4.87 percent in October from 5.02 percent in September, the government said on November 13. Although headline inflation stayed within the RBI’s tolerance range of 2-6 percent for the second month in a row, it has been above the medium-term target of 4 percent for 49 consecutive months.

Sujan Hajra, chief economist at Anand Rathi Shares and Stock Brokers, said the central bank will refrain from taking any repo rate action for the next one year.

"With declining inflation and ongoing economic resilience, the RBI will maintain the halt stance for the foreseeable future. We anticipate that inflation will fluctuate between 4 percent and 5 percent over the next 12 months. We therefore see little likelihood of any rate action occurring within this time frame," said Hajra.

The easing of inflation was attributed to the combination of a favourable base effect and cooling prices of some items, although rising onion prices kept the fall in inflation in check.

Also read: Consumer confidence up, inflation easing slowly, RBI surveys show

Among food items, vegetable prices rose 3.4 percent month-on-month primarily due to a 15 percent sequential increase in onion prices. Potato and tomato prices were more supportive of disinflationary developments. While potato prices were unchanged in October from September, those of tomatoes fell 19 percent month-on-month.

"There are some concerns in food prices, especially on kharif crops," said Sabnavis.

Total production of foodgrains is expected to be 148.56 million tonnes during the kharif season 2023, lower than 155.7 million tonnes last year, according to the agriculture ministry’s estimates in October.

The central bank, which has kept the key policy rate unchanged over the past four meetings, expects inflation to average 5.4 percent in FY24, a moderation from 6.7 percent in FY23.

After increasing the policy repo rate by 250 basis points to 6.5 percent in FY23 to curb inflation, the MPC left interest rates unchanged for the fourth time in a row on October 6.

RBI governor Shaktikanta Das said in early October the central bank remains highly alert and prepared to take steps to align inflation to the target.