Elevated retail inflation has raised concerns that the Reserve Bank of India may find it tough to continue with rate cuts.
Higher food prices pushed India's retail inflation to 4.62 percent in October, breaching Reserve Bank of India's medium-term target of 4 percent, data released by the Central Statistics Office (CSO) on November 13 showed.
Core inflation moderated to 3.3 percent from 4.2 percent in September on the back of subdued economic activity.
Inflation stood at 4 percent in September 2019 and 3.4 percent in October 2018.
Meanwhile, October WPI Inflation came in at 0.16 percent against 0.33 percent in September.
Elevated retail inflation has raised concerns that the RBI may find it difficult to extend its rate reduction regime.
However, most analysts and economists are of the view that the central bank will go for another rate cut in its December policy meet keeping in view the sluggish pace of the economy.
India's GDP—which grew 5 percent in April-June 2019, buffeted by weak household spending and muted corporate investment—is expected to moderate further in the September quarter, reports from rating agencies and financial firms suggest.
Impact on the market
The market was expecting a rise in inflation numbers so the impact will be limited, experts say.
"We don’t see any major impact of inflation on the market as the core inflation remains under check," said Rusmik Oza, Head of Fundamentals Research at Kotak Securities.
More than inflation, it would be the depreciation of the Indian rupee against the US dollar that could hit equities, he said.
Oza expects some profit-booking to take the Nifty closer to 11,400-11,500 levels before it rises again and goes into a new zone closer to the Union Budget.
He said the calendar year 2020 would be very good for Indian equities and recommended that investors use the dips to increase exposure in stocks, especially mid and smallcaps.
Amit Gupta, CEO & Co-Founder, Tradingbells said the market may see some pressure especially in banking and other financial stocks but the overall trend of the market will remain bullish till Nifty trades above 11,700.
A rate cut most likely
At a 16-month high, retail inflation is a concern but the market was expecting the numbers to be on the higher side.
"CPI-based inflation came in at 4.6 percent for October 2019, which is in line with our estimate and slightly higher than the consensus of 4.4 percent," said brokerage firm Motilal Oswal Financial Services.
The brokerage expects headline inflation to touch 5 percent around December 2019-January 2020 and stay put until March 2020. Further, it expects core inflation to bottom out and pick up only gradually to 4 percent by March 2020.
On rate cut, Motilal Oswal expects the RBI to give primacy to growth slowdown over higher inflation. "We expect another rate cut in December 2019," said the brokerage firm.
Bank of Baroda, in a report, said it also expected another rate cut in December, as growth in Q2 was likely to dip to 4.5 percent from 5 percent in the previous quarter.
"Growth in FY20 is now expected at 5.2 percent from our earlier estimate of 6.2 percent with a gradual pick-up to 6.2 percent in FY21. While MPC members will raise concerns on inflation, the focus will remain on growth and thus the 25bps rate cut," the bank said.
The rate trajectory post-December policy would depend on the outlook for FY21. Subdued growth and fiscal restraint may warrant another rate cut in February 2020 or April 2020 policy, it said.
Amar Ambani, Head of Research, Institutional Equities, YES Securities, said it the RBI should remain support growth.
"It imperative for the RBI to remain accommodative and support growth. With CPI inflation projected to average below 4 percent amid widening negative output gap, we expect the RBI to deliver another 25-40 bps in the rest of FY20, before getting into a prolonged pause,” Ambani said.
Brokerage firm Emkay Global Financial Services said the elevated inflation would turn the RBI cautious, but the focus would continue to be on slowdown.
"We believe that the RBI would do another 50bps cut in FY20, based on a high likelihood of output gap widening by more than 90bps from its projection. Earlier rate cuts of 135bps has led to only 35bps cut in MCLR," said Emkay Global.
Gupta of Tradingbells sees two possibilities for December monetary policy: First, MPC may take a pause in the December policy meet and cut rates in later meets after understanding the trends in CPI as the US fed chairman Powell also indicated a pause in the December Fed meeting.Secondly, MPC may overlook CPI and continue with the rate cut cycle, considering the rise in CPI is mainly on account of food and vegetable inflation which may ebb soon, Gupta said.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.