Inflation eases to four-month low, but RBI may not precede US Fed in rate cuts, say economists

India’s retail inflation eased to a four-month low of 5.09% in February, down by one basis point from 5.1% in January. data from the statistics ministry showed.

The consumer price index (CPI)-based inflation remained above the Reserve Bank of India’s (RBI) target of 4%, but within its tolerance band of 2-6% for the sixth consecutive month. 

Meanwhile, US inflation data also showed that consumer prices in the world’s largest economy increased higher than expected in February amid higher costs for gasoline and shelter. 

US CPI inflation rose 0.4% last month after climbing 0.3% in January. On a year-on-year (YoY) basis, the US inflation increased 3.2%, after advancing 3.1% in January.

Read here: February inflation remains steady at 5.1% but food inflation up

The marginal fall in India’s headline retail inflation last month was in line with the expectations of most economists and they expect the RBI’s Monetary Policy Committee (MPC) to stay put in the next meeting but may look to cut the repo rate in the second half of calendar year 2024.

Madhavi Arora, Lead Economist at Emkay Global Financial Services expects higher food prices to pull headline inflation upwards in March, however, core inflation to ease further, and continue to significantly undershoot headline inflation in FY25 as well. 

“We see FY25E inflation at 4.8% (FY24: 5.4%), with core at 4.0% (FY24: 4.4%). However, the RBI is likely to focus on achieving the ‘last mile’ of disinflation, and will not precede the Fed in any policy reversal in CY24,” Arora said.

Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India expects CPI inflation to remain slightly above 5.0% till May and declining thereafter to 3% in July. He expects inflation to stay below 5% beginning November till the end of FY25.

Meanwhile, a favourable base effect is expected to persist until July 2024, helping absorb potential upward risks to price pressures to a certain extent. The forthcoming monsoon in FY25 also holds significant importance for the trajectory of food inflation. 

Also Read: US inflation rises again in Feb

“For FY24, we expect inflation to average 5.4%, with Q4FY24 at 5.1%. We expect inflation to average 4.8% in FY25. Given that the RBI Governor has been highlighting the aim of getting inflation to 4% on a durable basis, the policy rates are likely to be kept on hold in the upcoming policy meeting, with no change in stance,” said Rajani Sinha, Chief Economist, CareEdge Ratings.

Manish Chowdhury, Head of Research, StoxBox also does not expect any material change in the central bank’s monetary policy stance in its April meeting as economic growth remains robust and inflation still hovers above the 4% target. 

“Our sense is that the RBI Governor will not move the needle until inflation, especially food inflation, comes down to acceptable levels on a durable basis. With the last leg of easing inflation expected to be sticky, we do not foresee a rate cut of more than 50 bps in FY25,” Chowdhury said.