Inflation cools off beyond expectations but uncertainty lingers, say experts

Experts said that liquidity conditions may get tighter going ahead

The fall in India's headline retail inflation in September 2023 was beyond what the market had expected but uncertainty continued to linger, according to experts. Additionally, experts said that the central bank is expected to maintain a prolonged pause in repo rate in the fiscal year (FY) 2023-24.

“The moderation in core inflation indicates that generalisation of price pressures has not taken place. Hence, the Reserve Bank of India (RBI) is expected to remain on prolonged pause in FY24,” said Gaura Sen Gupta, Economist, IDFC First Bank.

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, "The CPI inflation moderated more than our expectations. However, higher crude oil prices and persistence of price pressures on cereals and pulses remains to be watched for. Overall we expect the MPC to remain in a prolonged pause mode at least through mid next year."

ALSO READ: Retail inflation drops to 5.02% in September, lowest in 3 months

The consumer price index (CPI) rate fell to 5.02 percent in September, according to data released by the Ministry of Statistics and Programme Implementation on October 12.

At 5.02 percent, the Consumer Price Index (CPI) inflation print for September is 181 basis points lower than August's 6.83 percent. One basis point is one-hundredth of a percentage point.

The lower-than-expected inflation of September is expected to give some relief to the bond yields in coming days, money market experts said.

“I think this would be positive for markets and provide breather to yields, which have been headed higher since the MPC review, further fueled by geo-political developments. Overall positive for markets,” said Akhil Mittal – Senior Fund Manager- Fixed Income, Tata Asset Management.

Since the RBI’s October monetary policy, yield on the government bonds has risen sharply after the Governor Shaktikanta Das said the RBI may consider open market operations (OMO) sales of government securities.

Soon after the announcement, by the RBI, yield on the 10-year benchmark government bond started rising. On October 12, yield on 10-year Indian government bond 7.18 percent 2033, closed at 7.2977 percent.

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

Meanwhile, RBI's latest forecasts, released on October 6, had implied an inflation reading of 4.8-5 percent for last month. Speaking at the annual meeting of the World Bank Group and International Monetary Fund (IMF) minutes after the release of the CPI data, RBI Governor Shaktikanta Das said the latest inflation print is exactly in line with the central bank's projections.

Although headline inflation has returned to the Indian central bank's tolerance range of 2-6 percent, it has now completed four full years above the medium-term target of 4 percent.

Here focus will remain on keeping liquidity conditions tight to prevent generalization of price pressures and enable transmission of past rate hikes. We expect liquidity conditions to get progressively tighter with a pick-up in currency leakage from festival season,” Sen Gupta said.

Bhardwaj said: “Overall we expect the MPC to remain in a prolonged pause mode atleast through mid next year, while ensuring short-term rates remain high through tighter liquidity conditions in order to buffer for the adverse global cues.”