Why Axis' Neelkanth Mishra does not see room for rate cuts

Mishra, also a part-time member of the Economic Advisory Council to the Prime Minister of India, said on Wednesday that if food inflation doesn't ease, the monetary policy committee (MPC) would not have enough room to lower the repo rate. In fact, as per his report titled ‘India Economic and Market Outlook 2025’, the repo rate is likely to stay unchanged at 6.5% till the end of 2025-26.

India’s rate-setting panel has held the key repo rate at 6.5% since February 2023 as it keeps its eyes on the “last mile of disinflation". RBI’s steadfast focus on inflation has ensured that it did not lower rates even in the December policy, even as senior government ministers signalled discomfort with high borrowing costs.

“What is likely to happen is that the MPC may not see the room to ease. If headline inflation is going to average at 4.5% in FY26 where is the room to cut? If growth is going to be at 6-6.5%, where is the room to cut?" Mishra, who is also the part-time chairperson of Unique Identification Authority of India, said in an interview.

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India is dealing with the dual problem of slackening growth and persistent high inflation. The economy expanded at 5.4% in the three months through September, lower than the 7% growth projected by RBI and the slowest pace in seven quarters. On the other hand, barring a few months of reprieve, headline retail inflation has consistently stayed outside of the monetary policy committee's (MPC) target of 4%. In October, inflation as measured by the consumer price index (CPI) was 6.21%, higher than 5.49% in September.

There have also been some calls to look through food prices and instead target core inflation or aggregate inflation stripped off food and fuel. In July, the Economic Survey for 2023-24 suggested excluding food prices from India’s inflation-targeting framework. Food is currently assigned a 46% weight in the CPI basket. The government, as part of its inflation-targeting mechanism, had in March 2021 retained RBI’s flexible inflation target in the 2-6% band for the five years through March 2026.

“Until the law changes, the debate is inconsequential," said Mishra, also head of global research at Axis Capital. “MPC's mandate is headline inflation."

However, Mishra’s report found that while core and food inflation trends may diverge over short time periods, of say a few quarters, over longer periods, like a few years, they move together. Between 2011 and 2024, food and core indices rose 125% and 120% respectively.

According to Mishra, the cash transfer schemes of various state governments and the ensuing increase in demand for food is among the reasons why such inflation could persist. State governments like Maharashtra, Andhra Pradesh, West Bengal and Odisha are among the 14 states that have started cash transfers for women. As per Axis Bank, the annual outlay of these schemes put together is around ₹2 trillion or 0.6% of India’s gross domestic product (GDP) and benefits 134 million women.

This is leading to an increase in the volume of food consumption, Mishra said. “While it is also showing up in demand for meat, be it mutton or chicken or even demand for milk, those markets are a lot more flexible than vegetable markets in terms of the supply side."

However, it is different for potatoes, onions and tomatoes. “The access to markets, access to seeds become bottlenecks and, therefore, the supply response is constrained. With elevated prices, supply will come, but with these new schemes there is a persistent positive impetus on demand," he said, adding that food inflation may not come down as fast as it would have otherwise.

While the current schemes are expected to add 1.5% to demand, Mishra believes that as more states introduce such schemes, additional demand might be even higher. “As more states—say Bihar in 2025 and Uttar Pradesh in 2026—launch such schemes, there could be a further boost. With around 3-4% annual increase over the past decade, this means nearly half a year worth of additional demand." This, he said, could take a few quarters for supply to respond adequately, limiting room for the MPC to cut rates.

Read more: Inflation likely eased to 5.5% in November: Mint poll

Speaking on the equity markets, Mishra said because of SIPs (systematic investment plans), and inflows from non-SIP mutual funds, provident funds and insurance, the demand for equities was for a while in excess of supply. This, he said, was incessantly pushing up price-to-earnings multiples.

“This year, supply is now well in excess of demand. It is ₹7.5 trillion of supply, compared to ₹6 trillion of demand. So going forward, in the next 12 months also, I think supply will remain elevated and I don't think demand is going to grow so much that it will catch up to supply."

In October, Securities and Exchange Board of India (Sebi) whole-time member Ananth Narayan had flagged an imbalance in the equity market, citing a mismatch between demand and supply of securities, Business Standard reported.