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Business News/ News / India/  Will RBI extend pause in upcoming policies as April inflation eases to 18-month low?

Will RBI extend pause in upcoming policies as April inflation eases to 18-month low?

CPI inflation eased to 18-month low due to softening in food prices. This has heightened expectations of further pauses in repo rate in the upcoming monetary policies.

Inflation is at the lowest level since October 2021.  (pradeep gaur/mint)Premium
Inflation is at the lowest level since October 2021. (pradeep gaur/mint)

In a major relief, India's inflation eases to an 18-month low, reaching 4.7% in April 2023. This would be for the first time since January 2022, that the consumer price index (CPI) eased below RBI's upper tolerance limit. The latest print comes as comfort as expectations of a further pause in forthcoming policies have heightened.

In April 2023, CPI stood at 4.7% against 5.66% in March 2023 and 7.79% in the same month a year ago. The sharp decline in inflation figures can be attributed to the high base and softening of vegetable prices and energy prices. This is in line with expectations.

Explaining the performance, Vivek Rathi, Director of Research, Knight Frank India said, inflation moderated "primarily supported by a high base and softening of vegetable prices and energy prices. When measured sequentially, the consumer inflation has inched up by 0.5%."

Meanwhile, food inflation stood at 3.84% in April 2023, as against 8.31% in the same month a year ago and 4.79% print in March 2023.

Read here: CPI inflation falls below RBI's upper tolerance limit for first time in 14 months, at 4.7% in April

In this regard, Suvodeep Rakshit, senior economist of, Kotak Institutional Equities said, "Food inflation has been coming off mostly on the back of deflation in oils and vegetables (with seasonal pick up in prices visible)."

Further, Rakshit added, "Core inflation at 5.1% continued to fall sharply primarily due to base effects with sequential increases remaining relatively elevated at 0.6% mom."

However, Rathi also pointed out that inflation levels are still elevated impacting the discretionary spending of the households. The wholesale prices have declined sharply in the last few years, however, the producers/manufacturers have not yet passed on this price reduction to the consumers, to maintain their profit margins, in the current high-cost environment.

Thereby, Rathi expects the price pressure on households to continue to remain sticky in the near term.

What will be RBI's upcoming policy action after the April inflation data?

Rathi said, "Consumer inflation level coming down to an 18-month low and will set the market expectations on RBI’s interest rate setting decision next month. So far, high interest rates have had a moderate impact on the housing market with the affordable segment particularly taking major portion of the blow. If inflation rate trajectory gives some comfort to continue the decision on pause in this interest rate hike cycle, it will be the biggest comforting factor for the real estate industry."

Read here: Factory output rises 1.10% in March, grows by 5.1% in FY23

Inflation has been stubbornly high since the start of 2022 and stayed above RBI's upper tolerance limit of 6% which also pushed the central bank to hike repo rate by 250 bps from May 2022 to February 2023 policies.

In April 2023 policy, RBI took a tactical halt in the rate hike cycle. Currently, the repo rate is at 6.5%.

While Rakshit said, "Overall, the RBI will see this print favourably and remain on a pause in the June policy while maintaining a cautious outlook on inflation. We continue to pencil in the repo rate to remain unchanged for an extended period subject to global growth prospects, central bank actions, and domestic growth prospects."

Similarly, Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, "Upside risks to inflation persists given the monsoon related uncertainty. We expect the RBI to stay on a prolonged pause in order to anchor inflationary expectations."

The probability of a pause in repo rate in upcoming policies is higher than a "rate cut".

Aditi Nayar, Chief Economist, Head - Research & Outreach, ICRA said, "CRA foresees the CPI inflation to remain range-bound at 4.7-5.0% in May-June 2023. With a dip in the CPI inflation below 5.0% and surprisingly subdued IIP growth, we foresee a high likelihood of a pause from the MPC in its next meeting. However, a pivot to rate cuts appears quite distant."

But Nayar also believes that the intensity of monsoon onset which would be known when the MPC meets at its next scheduled meeting in June 2023 --- would feed into whether its CPI inflation projection of 5.2% for FY2024 needs to be modified.

ICRA's economist expects a rise in supply of state government securities in May-June 2023, closer to the indicated amount, to prevent G-sec yields from easing meaningfully in the near term.

If a pause is stored in June 2023 policy, the development is expected to support the equity market.

Anand Varadarajan, Director, Asit C Mehta Financial Services said, "In its recent policy meeting, the RBI kept the status quo for rates but clarified that the pause may not necessarily be a long-lasting one. However, the recent trend of easing inflation should give comfort of RBI to let this pause stay for a while, which in turn should support equity markets"

Lastly, RBI's focus can now shift towards growth and forex. 

Furthermore, Dr Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital believes that RBI can now focus on growth and forex. He added, "While RBI still needs to be watchful for some more time on inflation, by and large the RBI can now move its focus away from controlling inflation. Since the INR is proving quite resilient so far against the USD, it will be interesting to see the RBI policy actions to promote growth "

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Updated: 12 May 2023, 10:15 PM IST
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