Retail inflation: The options before Reserve Bank of India

With retail inflation breaching the central bank’s 4% medium-term target in October, attention has shifted to what the Reserve Bank of India will do at the monetary policy meeting in December.

The consensus among economists is that the central bank is likely to do a balancing act between checking inflation and pushing growth in its December policy, with most of them expecting another rate cut next month.

Apart from the inflation data, the monetary policy committee (MPC) will also look at the recent data on factory output, which shrank for the second straight month in September.

The MPC will also have the September quarter GDP data when it meets in December. In the June quarter, India reported its weakest growth in more than six years at 5%. The latest GDP estimates by banks indicate that the economy may slow down further. Nomura, for instance, has projected September quarter growth to decelerate to 4.2%.

After the October MPC meeting, governor Shaktikanta Das said the central bank will maintain its accommodative stance as long as it is necessary to revive growth, even as it ensures that inflation remains within target.

In October, the MPC cut the repo rate by 25 bps for the fifth straight time, taking the cumulative reduction in repo rate to 135 bps since January.

Though CPI inflation could continue to overshoot the MPC’s target of 4% by 50bps in the next few months, core inflation is likely to remain moderate and therefore the MPC may assign a higher weight to reviving growth, according to Upasna Bhardwaj, chief economist of Kotak Mahindra Bank.

“We continue to expect the MPC to cut the repo rate by another 50 bps in the rest of FY2020 as some of the increase in food inflation is seasonal and abundant rainfall should lead to lower food prices ahead,” Bhardwaj said in a note.