Oct rate cut unlikely even though CPI set to beat RBI forecast
Informist, Thursday, Sep 12, 2024
By Shubham Rana
NEW DELHI – India's retail inflation data for August has almost ensured that headline inflation will undershoot the Reserve Bank of India's forecast of 4.4% for Jul-Sep by nearly half a percentage point. But inflation turning out lower than the central bank's expectations is unlikely to prompt the Monetary Policy Committee to cut interest rates when it meets next month.
At 3.65%, headline retail inflation in August was largely unchanged from July's 59-month low of 3.60% and broadly in line with economists' expectations of 3.6%. To make matters more comforting, this was the second consecutive month in which inflation had remained below the RBI's target of 4%.
However, the two sub-4% inflation prints have a very favourable base effect to thank. And this effect is set to reverse in September. To get a flavour of this reversal, sample this: even if the general index of the CPI somehow remains unchanged for a third consecutive month in September – it was steady at 193.0 in both July and August – headline inflation will still rise to 4.8%.
Apart from the base effect, headline inflation may also rise because of higher food prices, according to economists. The Consumer Food Price Index, which fell 0.4% on month in August, could inch up in September.
On the whole, even if inflation jumps to 5% in September, the average for Jul-Sep will still be 4.1% - 30 basis points below the RBI's forecast. But this is unlikely to lead to the central bank loosening its grip on interest rates in the near term.
"RBI will look for inflation to stay low on a durable basis and hence will be circumspect again," said Madan Sabnavis, Bank of Baroda's chief economist. "We believe December will be the earliest point for considering any change in policy."
Low inflation driven by base effects will be ignored by the RBI, with Governor Shaktikanta Das saying recently that cutting interest rates on a one-off number of under 4% would be a "big policy mistake". The focus squarely remains on aligning inflation with the medium-term target of 4% on a durable basis.
The central bank's forecast is clear: inflation is set to rise to 4.7% in Oct-Dec. Even its most forward-looking forecast pegs average inflation in the first quarter of 2025-26 at 4.4%. Today's inflation print does little to alter that view.
If anything, matters could get ugly in the near term depending on how the monsoon pans out in September, with India Meteorological Department forecasting above-normal rainfall this month.
According to Aditi Nayar, chief economist at ICRA, the impact of the ongoing heavy rains and flooding in some regions and the development of La Nina conditions on the kharif harvest must be closely monitored. YES Bank's economists are in agreement, saying that food prices are "not in the green zone yet".
Despite the favourable base effect, food inflation in August was 5.66%.
The RBI is seemingly more optimistic about the outlook for food inflation, with Das saying earlier this month that conditions could become "more favourable" going ahead.
The MPC meets next on Oct 7-9, with Das and fellow representatives from the RBI set to be joined by three new external members. Armed with no additional inflation data, India's rate-setters can only be expected to keep their focus on food inflation, making it unlikely that they will finally lower interest rates. End
