Inflation At 4-Month Low! A Rate Cut Case In December Policy, Or Yet Another Status Quo From RBI?

RBI is in a sweet spot with India's retail inflation falling to at 4-month low of 4.87% in October 2023. This would be the second consecutive month when CPI has stayed within RBI's target range. The central bank has held rates for the fourth policy in a row at 6.5%, the highest since August 2018. The reason is the inflationary pressure that escalated after Russia invaded Ukraine in early 2022s. But with the latest decline in CPI does that mean a rate cut case is sooner than expected?

RBI will be meeting for yet another bi-monthly monetary policy from December 6th to 8th for FY24.

The consumer price index (CPI) came in at 4.87% in October 2023, compared to 5.02% in September. Inflation is currently closer to RBI's medium-term target of 4% and below the upper tolerance limit for the second consecutive month. Also, retail inflation declined significantly in both rural and urban to 5.12% and 4.62% as compared to 5.33% and 4.65% in September 2023. However, the consumer food inflation index (CFPI) came in at 6.61% in October 2023, which was broadly muted compared to the 6.62% print in September.

The November inflation print will be released on December 12. Hence, the October inflation rate will be the latest that RBI will take into consideration during the December policy meeting.

On the latest inflation, Vivek Rathi, Director of Research, Knight Frank India said, "The moderation of consumer inflation to a four-month low of 4.87% is noteworthy, given the widespread nature of this decline across various product categories, including food and beverages and manufactured items, in October 2023. This decrease aligns with the Reserve Bank of India's (RBI) target range of +/-4%, indicating the effectiveness of the decision to prioritise economic growth while maintaining a pause on monetary policy actions, particularly regarding interest rate hikes after February 2023."

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services explained that the declining trend in CPI is likely to continue taking the October CPI print to 4.9%. The decline in vegetable and edible oil prices can facilitate the downward shift in CPI inflation. The decline in Brent crude from the September high of $96 to around $80 now is a big relief.

According to Rathi, the stability in interest rates has played a crucial role in bolstering both consumer and business confidence within the country, especially in the face of challenging geopolitical circumstances and a decelerating global economic environment. Despite these headwinds, the housing market in the country continues to outperform its global counterparts, and the persistence of stable interest rates is expected to further stimulate demand in the housing sector.

Furthermore, Vijayakumar added "The RBI is safely placed since India's growth momentum is strong and CPI inflation is within the central bank's target range. Forex reserves of around $600 billion and the Fed having paused in the rate hiking cycle, there is no pressure on the RBI. High-frequency data indicate that the Indian economy is cruising towards 6.5% GDP growth in FY 24. This macro construct of robust growth with macro stability allows the MPC to wait with no rate action in the coming policy meeting."

However, despite the latest fall in October's inflation rate, Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers said, " Yet, since the monthly inflation figures are notoriously volatile, this ought not to elicit apprehension. As the overarching pattern of declining inflation persists, the central bank would find solace in an inflation rate that has now fallen below 5%. As a result of declining inflation and ongoing economic resilience, the Reserve Bank of India will maintain the halt stance for the foreseeable future. We anticipate that inflation will fluctuate between 4% and 5% over the next twelve months. We therefore see little likelihood of any rate action occurring within this time frame."

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.