Will it cut interest rates or not? That will be a key question when the Reserve Bank of India's monetary policy committee meets next in December. Last time around, the MPC left the repo rate unchanged at 6.50 per cent, but chose to change its stance to neutral. That had sent signals that the central bank was perhaps positioning itself to start a rate cut cycle, even if shallow, in December. But, a resurgence in inflation may have thrown a spanner in the works.
The US Federal Reserve on November 7 cut its key interest rate by 25 basis points. This was on top of the outsized 50 bps rate cut in September. The Bank of England and the European Central Bank too have cut interest rates in recent months. The rate cuts in the West come at a time when supporting growth has gained priority amid escalating geopolitical tensions and cooling inflation.
In India too, slowdown signs have emerged, be it sluggish urban demand for fast-moving consumer goods or passenger vehicles. But, inflation remains a big worry. India's CPI (consumer price index) inflation surged to a 14-month high of 6.2 per cent in October. Food prices spiking 10.87 per cent last month continues to fuel inflationary pressures. As the MPC meets next, will it continue to focus on inflation and keep interest rates unchanged or will its attention turn to the slowdown signs and in turn prompt a rate cut?
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"While the RBI’s change in stance from withdrawal of accommodation to neutral at its last MPC raised expectations of rate cuts in December 2024, inflation data of the past two months indicates that the RBI would hold rates. This is consistent with our view that rate cuts will begin only at the beginning of 2025," pointed out Sujan Hajra, chief economist and executive director at Anand Rathi Shares.
Pranjul Bhandari, chief economist, India and Indonesia at HSBC, also believes RBI will leave interest rates unchanged in December.
"As the RBI makes its assessment of India's growth-inflation dynamics for the upcoming December policy meeting, we find that a lower proportion of activity indicators are growing at a fast clip compared to a quarter ago, particularly in financial services and consumption-related sectors. Meanwhile, even as food prices remain elevated thus far, they could start falling in early 2025, at least going by food production and sowing estimates," said Bhandari.
She feels the RBI could deliver the first rate cut in February 2025, by which time, it would have gained some confidence that the food price spike will drop.
Economists say food inflation remains a major threat to headline CPI inflation and managing that will be crucial given its impact on household consumption budgets. Besides, monetary policy alone may not be enough to get food prices under control and may need more supply-side measures from the government.
As the fresh food harvest starts reaching the market, some of the pressure on food prices is likely to ease. Prospects for winter crop sowing are also positive after good monsoon rains this year. However, current trends suggest that CPI inflation may exceed RBI's earlier projections in the October-March period this financial year and that may delay the start of a rate cut cycle, according to Rajani Sinha, chief economist at CAREEdge Ratings.
"We anticipate that headline inflation will fall below 5 per cent by the fourth quarter of 2024-2025, driven by a moderation in food inflation. This would create an opportunity for the MPC to consider a 25 bps reduction in policy rates in February meeting," said Sinha, who now sees CPI averaging 4.8 per cent for the full year ending March 2025. The RBI has earlier forecast CPI inflation to average 4.5 per cent this financial year.
CRISIL's chief economist Dharmakirti Joshi too expects the MPC to maintain a status quo in the December meeting.
"In our base case, we expect food inflation to ease this fiscal as kharif sowing has been healthy. Vegetable prices can correct sharply when fresh stocks enter the market. Accordingly, we expect the MPC to cut rates towards the end of this fiscal," he noted.
