With the headline inflation spike in October to a 14-month high at 6.21 per cent YoY, above the official forecast of 4.8 per cent YoY, economists and experts postponed their rate cut call to February 2025 from December 2024. Radhika Rao, Senior Economist, DBS Bank, said that with firm inflation, hawkish speak from the central bank and heightened global volatility, rate cuts are off the table in December. “October’s print, nonetheless, marks a peak in this cycle, with food costs to moderate as kharif supplies return to the market. The next data of interest will be the Jul-Sep24 growth numbers due end-month, which is expected to reflect the recent slowdown in high frequency activity indicators. Financial market stability will also be key for the authorities. A dollar rally post the US elections has pushed the rupee to a record low this week. We see a window for rate cuts in February contingent on market stability, cool off in inflation and more evidence of a cyclical slowdown,” she added.
What goes up must come down: Inflation, growth print will be decisive factors for MPC in Dec
The Consumer Price Index (CPI) inflation for October 2024 reached 6.21 per cent, significantly above September’s rate of 5.5 per cent. The Reserve Bank of India targets retail inflation at 4 per cent, with a tolerance level of two percentage points on either side. On a sequential basis, inflation rose by 1.34 per cent in October.
The inflation rate was driven by a sharp rise in food prices, with the Consumer Food Price Index (CFPI) reaching a provisional 10.87% in October, highlighting an intensified pressure on household expenses. “What goes up, must come down,” said Shreya Sodhani, Regional Economist, Barclays, while adding that the ‘outlook’ for growth and inflation will be the decisive factors for the MPC at the December meeting. “By the December meeting, the MPC will have high frequency price indicators for the entire month of November and growth indicators for October. We expect Q2 GDP growth to slow to 6.2 per cent YoY. In our view, slowing urban demand and weakness in exports could continue to weigh on growth. We therefore reduced our growth forecast for FY25 to 6.8 per cent (from 7.0 per cent earlier) and think the RBI will also need to lower its 7.2 per cent growth forecast at the December meeting. The policy decision will then hinge on which way the MPC sees risks – for higher and persistent inflation, or weaker demand risks,” Shreya Sodhani said.
Barclays report stated that the 6%+ print for October complicates the picture for the forecast of rate cuts starting in December. “We continue to expect a rate cut in December but acknowledge that this is now a very close call,” it said, while maintaining that slowing in growth below potential provides a rationale for the central bank to ease monetary conditions, to support growth, particularly considering: 1) a favourable outlook for inflation to align towards the 4 per cent target from Q4, as per the RBI’s forecasts; and 2) the lag in the transmission of monetary policy (3-4 quarters), amid the slack in private investment.
Elara Securities stated, “We do not expect food prices to correct before mid-November, thereby preventing any meaningful moderation in the November CPI print. Recent sharp depreciation of the Rupee, along with FII outflows are likely to exacerbate RBI’s task of managing external sector pressure amidst elevated inflation print. We revert to our first rate cut call in February 2025 from December 2024, as it would give the RBI better clarity about the inflation bump in Q3FY25E and the overall trajectory. While our base case remains a 25bp cut, we do not rule out a 50bp cut in February 2025 if the CPI surprises on the downside or even remains within the RBI’s estimates as risks to growth have started to amplify.” The brokerage firm expects FY25E GDP to grow by 6.7-6.8 per cent from 7.0 per cent YoY earlier and vs 7.2 per cent estimate of RBI as government spending remains sluggish and consumption demand softens.
Dharmakirti Joshi, Chief Economist, CRISIL, said, “We expect the MPC to hold rates steady in December, given the sharp rise in food inflation in September and October. That said, in our base case, we expect food inflation to ease this fiscal as kharif sowing has been healthy. Vegetable prices can correct sharply when fresh stocks enter the market. Accordingly, we expect the MPC to cut rates towards the end of this fiscal.”
Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings, while anticipating some relief in the overall food inflation once the kharif crop arrives in the market in late Nov-Dec, stated that RBI is expected to not take any action on interest rates in Dec’24. Further, he added, “the chances of a rate cut in Feb’24 has also become a bit uncertain given the global scenario and the new administration in the US will hinge on a steady decline in food inflation over the next few months”.