RBI unlikely to change stance, no relief on cards, but experts fear pre-poll hike in food prices

Food inflation slightly decreased to 6.2% YoY in October, led by reduced inflation in categories like 'meat and fish,' 'milk and products,' and 'vegetables.

Brokerages anticipate no change in the Reserve Bank of India's hawkish stance on rates and no relief on the cards as analysts fear a pre-election escalation in food prices.

"While the uptick in foodgrain prices following an uneven monsoon has manifested in overall cost of food in October, higher prices of some vegetables like onions would be partly absorbed by the typical seasonal downtrend in many other vegetables, offering some respite," said Aditi Nayar, chief economist and head of research and outreach programmes at ICRA Ltd.

Nayar sees the RBI maintaining a hawkish stance in the December 8 policy meet, keeping the rates unchanged. She predicts a likely rate cut around August 2024, starting with a modest reduction of 50-75 basis points.

India's headline retail price inflation dropped to a four-month low of 4.9 percent in October from 5 percent in the previous month. Food inflation slightly decreased to 6.2 percent, led by easing of inflation in categories like meat and fish, milk and milk products, and vegetables. However, excluding vegetables, the food CPI had scaled a seven-month high of 6.9 percent in September due to surge in price of cereals and pulses. Core CPI also decreased to a post-Covid low of 4.3 percent, indicating a widespread deceleration. Additionally, core CPI, excluding commodities, dipped to 4.1 percent.

RBI Governor Shaktikanta Das recently cautioned that the headline inflation might persist longer than expected because of a sharp decrease in sowing areas for oil seeds and pulses, potentially leading to reduced crop output and higher prices.

"We expect the Reserve Bank to remain vigilant since headline inflation remains above the Monetary Policy Committee’s 4 percent target and risks to food and fuel persist. Our base case for this fiscal is average inflation of 5.5 percent and the MPC maintaining the policy rate and stance," said Dharmakirti Joshi, chief economist at CRISIL.

Motilal Oswal Securities believes that the headline inflation has bottomed out. The brokerage estimates inflation rising to 5.5-6 percent in November-December 2023 and stabilising around 5.2 percent in the fourth quarter of FY24. Consequently, they do not foresee any relaxation in the RBI's monetary policy next month or in the coming months.

Barclays notes that the overall inflation remains largely controlled due to a steady INR, manageable energy expenses, and a tax policy offsetting fuel prices. While robust economic growth and persistent demand may apply some inflationary pressure, they anticipate the headline inflation (both CPI and WPI) to stay manageable. However, they acknowledge short-term risks from fluctuating vegetable prices.

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