Is November CPI inflation at 5.88% a game changer on RBI rate hikes?

Representative image.

On December 12, data showed that India's headline retail inflation rate fell to an 11-month low of 5.88 percent in November from 6.77 percent in the previous month.

At 5.88 percent, the consumer price index (CPI) has come below the monetary policy committee (MPC)’s target upper band of 6 percent for the first time this year. Is it good news?

Certainly, for the central bank, which is in the spotlight for inflation management failure, this number is a big relief.

The decline in inflation gives some breathing space to the MPC as it continues to fight inflation. The fall in the inflation number was largely contributed by a drop in food inflation. But, this doesn’t mean all is well. Core inflation, which is the non-volatile part of the headline inflation, remains sticky and elevated at over 6 percent.

Core inflation still at elevated level

In fact, core inflation has averaged around 6.2 percent to 6.3 percent in fiscal year 2023. The RBI doesn’t like high core inflation. In the recent MPC statement, the RBI Governor had highlighted the elevated core inflation as a key risk, going ahead.

The RBI tracks core inflation closely for policy formulation purposes. In the last policy meeting, the RBI Governor Shaktikanta Das had stressed the elevated and sticky nature of core inflation.

The RBI is currently playing a catch-up as it delayed the inflation fight for too long. Inflation has stayed above the desired target level from early 2020 and above 6 percent for nearly a year.

Global factors played a role in the inflation spike but the writing was on the wall already. The logic that growth would have taken a hit by early action on inflation is not convincing enough. High inflation has been hurting the common man more. Prices of essential items, including food and vegetables, have shot up significantly, raising questions on timely action from the government and the central bank.

The RBI has woken up to the reality too late that inflation has gone far beyond its control.

Dec inflation figures likely to be high

Will the November inflation numbers change the RBI’s mind on further rate hikes? It is unlikely. Apart from the fact that core inflation remains high, the RBI’s war on inflation is far from over. The December inflation number is expected to come higher due to the fading of base effect.

Also, the trajectory of food inflation is hard to predict as we have seen in November. The central bank is likely to wait for a few more months of data to see if the inflation fall would sustain and then take a call.

Remember, the central bank gets a wind of the inflation numbers, much ahead of the public. The fact that it sought to keep the rate stance unchanged even after this shows us the thinking within the MPC. The rate-setting panel has learned its lesson from its recent failure on keeping the inflation target below 6 percent.

The regulator wouldn’t want to risk its chances, once again.  A 25 bps-35 basis points rate hike in February looks certain at this point, unless December numbers surprise by a big margin.