With India’s retail inflation moderated to a three-month low of 5.1 per cent in January due to easing food prices, economists and experts said that RBI may look at cutting interest rates during the second half of the fiscal year. Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research, said, “In the latest MPC meeting, RBI has already indicated its close watch on the ‘last mile of disinflation’. Any change in the monetary policy stance and any rate cut is unlikely before Aug’24. The rate decision by the Fed and other developed nations will also be a factor in the MPC stance in the current calendar year apart from the domestic inflation trajectory.”
Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA Ltd, agreed, “We foresee cumulative rate cuts of 50-75 bps, commencing in the August 2024 meeting, and a stance change in the preceding review, after there is some visibility on the monsoon turnout.”
Per Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, RBI MPC is expected to start rate cuts in June. “We continue to expect cuts to start in June, although we highlight the risks of a delay with the governor signaling comfort on domestic growth and the Fed raising the bar for a March cut,” he said.
Furthermore, economists are expecting inflation to average 5.4 per cent for FY24, with Q4FY23 at 5.1 per cent. “We project the CPI inflation to ease below 5 per cent in February-March 2024, and average at 5.3 per cent in FY2024. Thereafter, we estimate the CPI inflation at 4.6 per cent in FY2025, broadly in line with that of the MPC, based on the assumption of a normal monsoon,” said Aditi Nayar from ICRA Ltd.
Here are insights/ views of economists and experts on the January CPI inflation print…
Dharmakirti Joshi, Chief Economist, CRISIL Ltd
Softening inflation in both food and non-food components brought down inflation to a three-month low of 5.1 per cent. Food inflation moderated to 8.3 per cent from 9.5 per cent. Vegetables inflation eased slightly but remained elevated at 27 per cent. Foodgrains inflation (cereals plus pulses) softened by ~200 bps. That said, prices of some key food items remain high and will need to be monitored. On the plus side, rabi sowing has picked up and exceeded last year’s level which augurs well for food inflation going forward. Core inflation eased to 3.5 per cent, its lowest level since 2019. Fuel prices continued to fall on-year, but the pace of the decline slowed. Disruption along the critical Red Sea route is a risk for fuel, commodity, and core inflation. In this backdrop, we expect that the RBI will hold interest rates steady till at least the June policy review.
Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA Ltd
The CPI inflation recorded a broad-based slide to a three month low 5.1 per cent in January 2024 from 5.7 per cent in December 2023. The correction in the inflation for food and beverages was led by a favourable base effect. We project the CPI inflation to ease below 5 per cent in February-March 2024, and average at 5.3 per cent in FY2024. Thereafter, we estimate the CPI inflation at 4.6 per cent in FY2025, broadly in line with that of the MPC, based on the assumption of a normal monsoon. The MPC’s expectations around the growth outlook and its forecast that the CPI inflation will moderate while remaining above the 4 per cent target, reinforces our view of a likely shallow rate cut cycle. We foresee cumulative rate cuts of 50-75 bps, commencing in the August 2024 meeting, and a stance change in the preceding review, after there is some visibility on the monsoon turnout.
Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research
While RBI has projected an average CPI inflation of 5.0 per cent for the current quarter, it’s likely to be around the levels of 5.0-5.2 per cent over the next few months in our opinion. The upside risks from the continuing El Nino phenomenon and its impact on the rabi crop output can’t be discounted at this point in time. However, the retail core inflation is estimated to stand at 3.6 per cent in Jan’24, providing comfort to the central bank.
In the latest MPC meeting, RBI has already indicated its close watch on the ‘last mile of disinflation’. Any change in the monetary policy stance and any rate cut is unlikely before Aug’24. The rate decision by the Fed and other developed nations will also be a factor in the MPC stance in the current calendar year apart from the domestic inflation trajectory.
Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays
Headline CPI inflation eased to 5.1 per cent in January (December: 5.69 per cent), below our forecasts but broadly in line with consensus. The decline was driven partly by a favourable base, but even sequentially, prices fell by 0.11 per cent m/m nsa, although moderating from December’s 0.32 per cent drop. Core inflation eased further, while food price inflation also slowed.
Taking the data and early price indicators for February into account, we are tracking CPI inflation at 4.9 per cent YoY. We continue to expect CPI inflation to average 5.4 per cent this year (FY23-24), but see modest downside risks to this. For FY24-25, we expect inflation to average 4.6 per cent. With core inflation staying below the 4 per cent mark, we expect the RBI to express greater confidence on price pressures easing. However, as was evident from the Governor’s statement at the February MPC meeting, the bias will remain hawkish with the last mile of disinflation being the “most challenging”.
Still, with dissent in the MPC starting on the rate decision and a pivot in the global monetary cycle, we think the moderation in inflation may open a window for the RBI to ease as well. Indeed, real rates have turned significantly positive already, and could rise above ~2 per cent in Q1. We continue to expect cuts to start in June, although we highlight the risks of a delay with the governor signalling comfort on domestic growth and the Fed raising the bar for a March cut.
Rajani Sinha, Chief Economist, CareEdge Ratings
Within the food basket, despite sequential moderation in vegetable and fruit prices, inflation of non-perishables like spices and pulses continued to show double-digit trends, warranting close monitoring. The ongoing high inflation in specific food categories, including cereals, pulses, and spices, poses a risk of potentially broadening price pressures and de-anchoring inflationary expectations. Encouragingly, a notable recovery in rabi sowing over the past couple of weeks is a positive signal for food inflation. The government is actively implementing supply-side measures, such as increasing the quantum of Open Market Sale Scheme (OMSS) for wheat and rice and reducing stock limits for traders and wholesalers to curb price pressures.
Looking ahead, a favourable base effect is expected to persist until July 2024, helping absorb potential upward risks to price pressures to a certain extent. Additionally, the arrival of the early harvest in the market over the next few months is anticipated to alleviate price pressures further. For FY24, we expect inflation to average 5.4 per cent, with Q4FY24 at 5.1 per cent.
Manish Chowdhury, Head of Research, StoxBox
The consumer price inflation in India eased to a three-month low of 5.1 per cent in January from 5.7 per cent posted in the previous month, aided by cooling food prices and favourable base effects. Though inflation is still away from the RBI’s medium-term target of 4 per cent, it lies within the tolerance band of 2-6 per cent. We believe that the transient effect of high food prices is fading and the recent correction in crude oil prices bode well for the downward trajectory of inflation going forward. With the RBI firm on anchoring inflation expectations on a sustained basis, we do not pencil a rate cut in the next six months and expect the central bank to gradually cut rates from H2FY25 onwards.
Vaibhav Shah, Fund Manager, Torus ORO PMS
The government’s proactive food grain supply management and favorable progress on the rabi sowing front have played a key role in curbing food inflation, a major component of the overall index. This bodes well for the future, as it suggests that food price volatility is likely to remain subdued.
The current inflation rate sits comfortably within the RBI’s upper tolerance band of 6 per cent, providing policymakers with more flexibility to support economic growth. The downward inflation trajectory, coupled with consistent economic growth and growth-oriented policies, paints a positive picture for India’s macroeconomic fundamentals. This could attract better investment flows into the country, further strengthening its economic prospects.
Nikhil Gupta, Chief Economist, MOFSL Group
We see inflation hovering between 5-5.5 per cent, led by food in 1HCY24, before easing in 3Q towards 4 per cent and rising back to 4.5-5 per cent in the next two quarters. Thus, we don’t see any monetary policy action based on inflation this year. It will be determined by the domestic growth trajectory (if it turns out much weaker than the general forecast of 6.5-7 per cent) or if the US FED makes a sharp move.
Akhil Mittal, Senior Fund Manager-Fixed Income, Tata Mutual Fund
With RBI stating risk of food inflation translating into generalised inflation, we expect RBI to continue cautious stance. However, softening of core inflation should provide confidence in the trajectory of inflation moving as expected. We think RBI would rather continue with stability priority and continue maintaining the 4 per cent inflation target as sacrosanct, and hence we do not see premature easing from RBI. We think RBI would rather ease / indicate easing only when they are sure of achieving inflation target durably (we believe second half of FY25 could open space for easing).