Rate cut conundrum: Cooling India inflation meets firm US inflation, clouding investor hopes

As per latest data, in November, US consumer prices continued to rise, with the core consumer price index (excluding food and energy) climbing 0.3% for the fourth consecutive month, a 3.3% year-on-year increase.

Global inflation trends, elevated local food inflation and other macro challenges could create a conundrum for investors and policy makers in terms of monetary policy decisions going ahead.

While India Inflation data released on December 12 did give some reason to cheer for local investors, concerns over US inflation remain firm especially in the wake of Donald Trump’s potential inflation policy is making them nervous, analysts said.

Also read: US core inflation stays firm with fourth-straight 0.3% increase

Latest India inflation data showed signs of easing in November. Retail inflation cooled to 5.5 percent, down from October’s 14-month high of 6.2 percent. Food inflation also declined to 9 percent, compared to 10.9 percent in October, primarily due to easing of vegetable prices, although the headline inflation rate remains above the RBI’s comfort zone.

On the contrary, in November, US consumer prices continued to rise, with the core consumer price index (excluding food and energy) climbing 0.3 percent for the fourth consecutive month, a 3.3 percent year-on-year increase. Shelter costs accounted for nearly 40 percent of the overall advance, while grocery prices surged 0.5 percent. This is the steepest rise since early 2023.

Economists view core inflation as a key indicator of underlying trends. Firm core inflation combined with worries of President Elect Donald Trump’s policies causing potential rise in inflation is making markets jittery about rate cuts going forward. Several US Federal Reserve officials have been advocating a cautious pace for rate cuts despite price pressures subsiding from a peak seen during the pandemic recovery and reduced concerns over the labour market.

Also read: Retail inflation eases to 5.48% in November from 6.21% in October

What this means for rates

Market experts seem divided on the rate trajectory going forward. Some are hopeful of rate cuts in the coming session but note that challenges persist.

Vinit Bolinjkar, Head of Equity Research at Ventura Securities, expressed optimism. “If inflation drops further to 4.5–4.7 percent, the RBI might consider cutting rates in upcoming policy decisions,” he said.

December inflation data will be critical in determining the trajectory, according to Narendra Solanki, Head of Fundamental Research-Investment Services at Anand Rathi Shares and Stock Brokers. “If inflation stays above 5 percent, a rate cut in February 2025 could face significant hurdles,” he added.

Adding to the uncertainty is the new composition of the Monetary Policy Committee (MPC). “The new MPC’s stance and approach remain unknown, but favourable data trends suggest they might adopt a more accommodative stance,” noted Nirav Karkera, Head of Research at Fisdom.

India’s markets will be closely monitoring global developments. While domestic interest rates have constrained consumption and economic growth, the easing inflation outlook raises hopes for monetary policy easing.

But experts caution against a certain premature optimism.

Siddarth Bhamre of Asit C. Mehta adds that the numbers align with the RBI's inflation expectations for the third quarter of  FY25. “With a new RBI governor in place, the upcoming policy meeting promises to be quite interesting. However, we’ll need to wait for the next GDP print before making any decisive calls,” Bhamre added.

Madhavi Arora, Chief Economist, Emkay Global Financial Services has more fundamental concerns. She is of the view that that even with the sequential easing in food inflation, the annualised rate of 9 percent remains high. “We maintain our FY25 forecast at 4.9 percent, with Q4 easing to an average of ~4.75 percent. However, this doesn’t guarantee a deep, linear rate cut cycle. Mounting FX pressures and the rising cost of interventions will likely constrain the RBI’s flexibility,” she said.

Arora adds that the policy trade-offs are getting acute with a tricky and small window of conventional rate cuts as global dynamics turn more fluid. “We do not, for now, rule out a cut in February 2025, but would be more comfortable taking a firm call closer to the policy window. We also keep a watch on unconventional easing measures, specifically the gradual easing of regulatory lending norms ahead, to re-spur the waning credit offtake.,” she said.

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