RBI likely to maintain hawkish stance, keep rates unchanged in near-term as core inflation eases to 43-month low | Mint
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Business News/ Economy / RBI likely to maintain hawkish stance, keep rates unchanged in near-term as core inflation eases to 43-month low

RBI likely to maintain hawkish stance, keep rates unchanged in near-term as core inflation eases to 43-month low

India's retail inflation in October stood at 4.87 per cent, coming within RBI's comfort zone of 2-6 per cent for the second consecutive month.

RBI is likely to maintain its hawkish stance in the near-term. Photo: Aniruddha Chowdhury/MintPremium
RBI is likely to maintain its hawkish stance in the near-term. Photo: Aniruddha Chowdhury/Mint

India's consumer price index (CPI)-based inflation for the month of October came in line with Street expectations, giving rise to expectations that the Reserve Bank of India (RBI) is likely to maintain its hawkish stance on interest rates at its December monetary policy meeting.

India retail inflation softened to a five-month low at 4.87 per cent in October, compared to 5.02 per cent in September, according to data released by the Ministry of Statistics on November 13. Majority of economists expected CPI inflation to come in the range of 4.7 - 4.9 per cent on a sustained decline in vegetable prices.

Food inflation, measured by the consumer food price index (CFPI), which accounts for nearly half of the overall consumer price basket, slowed to 6.61 per cent in October from 7.01 per cent a year earlier. Food inflation was at 6.62 per cent in September, according to government data.

Also Read: RBI MPC Minutes: Inflation ruling above tolerance band, monetary policy to remain disinflationary

However, the most encouraging data for analysts was that core inflation eased to a 43-month low of 4.3 per cent. An important development for the conduct of the central bank's monetary policy is the stabilizing of core inflation, which also reflects a broad-based easing of price pressures across goods and services.

Can the RBI go for interest rate reduction sooner than expected?

Most analysts now expect the central bank to maintain its policy stance in the December policy meeting, after October's inflation- which came within RBI's comfort zone of 2-6 per cent for the second consecutive month. 

Aditi Nayar, Chief Economist, Head Research & Outreach, ICRA Ltd said, ‘’We expect the MPC to maintain a hawkish tone amidst a status quo on the rates and stance in its upcoming policy meeting. We see the earliest likelihood of a rate cut in August 2024, when a shallow rate cut cycle of 50-75 bps could commence."

A majority of experts believe that the RBI will keep interest rates unchanged in the current financial year and a rate cut could occur in 2024 only if the global economy weakens. On the global cues front, the 10-year US bond yields and crude oil prices have significantly declined after the US Federal Reserve kept the overnight benchmark interest rates unchanged.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers said, ‘’Observing the pattern of declining inflation in the last three months, the apex bank is likely to find comfort in the headline figure falling below 5 per cent. 

‘’Persistent falling inflation and the ongoing economic resilience are compelling factors, encouraging the RBI to keep policy rates unchanged for the near term. Thus, within this time frame, the possibility of a rate hike or cut seems unlikely,'' added Hajra.

At its latest rate-setting meeting in October, Shaktikanta Das-led rate-setting panel kept the repo rate unchanged at 6.5 per cent. The MPC had also decided to remain focused on withdrawal of accommodation - with five out of six members voting in favor, to ensure that inflation progressively aligns to the target, while supporting growth. 

‘’Going forward the impact of the El Nino phenomenon, geopolitical risk, upcoming kharif crop and the food output needs to be monitored for any policy stance,'' said Nish Bhatt, Founder & CEO, of Millwood Kane International.

India's retail inflation print: Here's what economists predict

While the uptick in food grain prices following an uneven monsoon has manifested in prices 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, according to economists.

Also Read: Impact of US inflation data on stock markets, here are 5 things to watch out for in near-term

‘’In our view, the CPI inflation would climb to 5.6 per cent by December 2023, and remain in a wide range of 4.9-5.6 per cent thereafter for the next two quarters, before a particularly benign base effect temporarily dampens it in Q2 FY2025,'' said ICRA's Aditi Nayar.

Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services Group said that CPI inflation- minus the veggies was down to 5 per cent, the lowest in 46 months. Inflation in core services (weight = 13 per cent) was 3.4 per cent, the lowest since the data is available from 2015.

Only 34.5 per cent of CPI basket posted 6 per cent inflation, the lowest since early 2021. ‘’Going forward, we believe that headline inflation has troughed. We expect it to rise to 5.5-6 per cent in Nov-Dec'23 and stabilise at ~5.2 per cent in 4QFY24,'' said Gupta.

At the October policy meeting, the RBI maintained its 5.4 per cent inflation projection for 2023–2024 and committed to take prompt action to stop any spillover effects from shocks in the price of food and fuel throughout the world.

“CPI inflation is projected at 5.4 per cent for 2023-24, with Q2 at 6.4 per cent, Q3 at 5.6 per cent and Q4 at 5.2 per cent. The risks are evenly balanced. CPI inflation for Q1:2024-25 is projected at 5.2 per cent," said Shaktikanta Das.

The next RBI monetary policy meeting is scheduled during December 6-8, 2023.

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Nikita Prasad
Nikita covers business news and has been producing news on digital platforms since 2018. She writes on economy, policy, markets, commodities, industry. Her core areas of interests include infrastructure, energy, oil and gas, railways, and transport/mobility. She has worked for business news channels like Moneycontrol, NDTV Profit, and Financial Express in the past. If you have story ideas/pitches/reports or quotes/views to share, reach her at nikita.prasad@htdigital.in.
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Published: 15 Nov 2023, 05:15 PM IST
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