India's retail inflation for August came in at 3.65 per cent. Although it was marginally higher than the 3.6 per cent inflation print in July, it was the second consecutive month that the inflation based on the consumer price index (CPI) has undercut the Reserve Bank of India's target of 4 per cent. That would perhaps raise hopes that with inflation aligning with RBI's target, it could finally be time for the monetary policy committee to begin lowering the benchmark repo rate.
The MPC had left the repo rate unchanged for the ninth time at 6.50 per cent, when it last met in August. Domestic inflation is not the only thing that the central bank will be closely watching. The US Federal Reserve is widely expected to lower interest rates when it meets next week. With US inflation dropping to a three-year low of 2.5 per cent in August, the debate now is whether it will go for a 25 bps cut or a more aggressive 50 bps.
The European Central Bank (ECB) has already lowered interest rates on Thursday, amid slowing inflation and economy.
So, will RBI too follow suit and begin cutting rates when it meets next in October or will it continue to wait and watch how inflation and growth dynamics pan out?
RBI Governor Shaktikanta Das's comments on Friday that while inflation had moderated, there was still a distance to cover, perhaps suggest that the MPC may be in no hurry to cut.
"Inflation has moderated from its peak of 7.8 per cent in April 2022 into the tolerance band of +/-2 per cent around the target of 4 per cent, but we still have a distance to cover and can not afford to look the other way," he said addressing a gathering at the Future of Finance Forum 2024 organised by the Bretton Woods Committee in Singapore.
India's strong economic growth, even as there is global uncertainty, will give RBI an added comfort.
The RBI projections indicate inflation to ease to 4.5 per cent in 2024-25 and 4.1 per cent in 2025-26, compared with 5.4 per cent in 2023-24. At the same time, real GDP has been projected to grow at 7.2 per cent in the current financial year, compared with average GDP growth of above 8 per cent during 2021-24.
"This growth outlook reflects the underlying strength of India’s macro-fundamentals, with domestic drivers – private consumption and investment – playing a major role. Moreover, the growth trajectory is supported by an environment of macroeconomic and financial stability," said Das.
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A key thing to monitor as far as inflation goes will be food inflation, which has been volatile over the past several months. According to data released by the NSO, CPI at 3.65 per cent in August was the second lowest in the last five years. But, inflation in vegetables was much higher at 10.71 per cent and in pulses and products at 13.6 per cent.
Economists at HSBC expect inflation to rise before falling later in the year.
"The high-frequency vegetable price data for the first ten days of September shows that some vegetable prices are rising, and alongside an unfavourable base, may lead to a higher inflation print of about 5 per cent in September. Yet, the average of the July-September quarter inflation would be lower than the RBI's forecast (4.1 per cent versus 4.4 per cent). And with our expectation of falling food prices, and lower energy inflation, headline inflation could fall by December, and further by March towards the 4 per cent ballpark," the economists said.
The HSBC economists are not expecting a rate cut or a change in stance in the October MPC meeting, but believe both are possible in December.
Madhavi Arora, lead economist at Emkay Global Financial Services, also continues to expect that the RBI will remain watchful in October.
"The RBI is likely to continue to stress on being actively disinflationary and maintains a wait-and-watch stance to assess multiple macro forces, unless of course, swinging global winds compel it to focus on financial stability over the 4 per cent inflation mandate," she said.
READ MORE: A surprise repo rate cut by RBI likely in October, say Nomura economists
The Fed's pivot will precede and impact the RBI's change in stance and rate action, added Arora.
Namrata Mittal, chief economist at SBI Mutual Fund, expects RBI will maintain a status quo on rates at least in the next two policy meets.
"The growth inflation mix in India could allow RBI to be patient on any rate moves. Moreover, an improvement in banking system liquidity has led overnight rates to soften," noted Mittal.
Dharmakirti Joshi, chief economist at CRISIL, pointed out that a relatively favourable base effect had aided in keeping inflation under 4 per cent in the last two months. From September, this effect was expected to fade and further easing of inflation would depend on sustained softening of food prices, he felt.
"We expect food inflation to ease relative to last fiscal given the good progress of monsoon and kharif sowing. Softer food inflation should pave the way for the RBI to initiate rate cuts," said Joshi.
CRISIL expects two policy rate cuts by the RBI this financial year, starting October at the earliest.
Sonal Varma, chief economist India and Asia ex-Japan at Nomura, also continues to maintain that a repo rate cut in October is likely. The upside surprise in inflation in August was due to "statistical issues in food" and did not reflect a "fundamental concern," she said.
"With oil prices lower and signs of moderating global growth, downside risks are rising for both GDP growth and CPI inflation. Our analysis shows that inflation is already durably aligned to the RBI's 4 per cent target, which calls for a recaliberation of policy settings," said Varma.
Nomura believes a 25 bps repo rate in October is likely and has projected a 100 bps rate cut to 5.50 per cent by the middle of 2025.
