Hopes of Feb rate cut grow as November inflation eases to 5.48%

India’s retail inflation, based on the Consumer Price Index (CPI), declined to a three-month low of 5.48% in November, mainly due to a fall in prices of vegetables, official data released on Thursday showed. In October, CPI inflation had overshoot the upper end of the Reserve Bank of India’s tolerance band, and came in at 6.21%, the highest print in 14 months. In November 2023, inflation stood at 5.55%.

The lower-than-expected headline inflation rate for November – the median of an FE poll of economists was 5.6%–, and a flat core inflation, are seen to have increased chances of a rate cut by the RBI in the February monetary policy. New RBI governor Sanjay Malthora on Wednesday underlined the need to “continue building on” three pillars namely stability, trust and growth.

Unveiling the December monetary policy, in which the repo rate was kept unchanged at 6.5% for the eleventh time in a row, former RBI governor Shaktikanta Das had stressed the need for durable price stability and “restoring the inflation-growth balance in the overall interest of the economy.”

The decline in Indian inflation is when globally many economies have again started experiencing price pressures , and China is looking at easing monetary policy through 2025 to simulate growth.

The RBI has projected CPI inflation to average 5.7% in Q3FY24. In the first two months of Q3, retail inflation has averaged 5.8%. Therefore, in December inflation will have to moderate further to 5.5% to match the RBI’s estimate for the quarter, which is likely, according to many economists.

“Inflation inched down in November as a moderation in vegetable prices started to set in with the onset of the winter season,” said Sakshi Gupta, principal economist, HDFC Bank. “However, within the food basket cereal and edible oil prices showed a sequential increase. We expect inflation to gradually inch lower towards 4.5% by the January-March quarter,” she added.

Core inflation, meanwhile, stayed flat at 3.7% in November. This indicates that broader economic conditions are not inflationary as such, say economists. To be sure, core inflation, which excludes volatile components of food and fuel, has stayed below 4% for 12 consecutive months.

Suman Chowdhury, chief economist, Acuite Ratings & Research said: “While the moderation in inflation does increase the chances of a rate cut by the RBI in the February policy, however, any upsets on food inflation due to a warmer winter or an increase in pressure on the rupee, could still nudge the central bank to postpone the rate cut to the April policy.”

The call for a rate cut has become louder post the lower-than-expected growth figure of 5.4% for Q2FY25. The RBI, however, didn’t cut the policy repo rate in December as the Monetary Policy Committee (MPC) is of the view that going forward economic activity is set to “improve” along with rising business and consumer sentiments, but the recent spike in inflation highlights the “continuing risks” of multiple and overlapping shocks to the inflation outlook and expectations.

High inflation reduces the purchasing power of both rural and urban consumers and may adversely impact private consumption, the December MPC statement noted. “The MPC emphasises that strong foundations for high growth can be secured only with durable price stability,” it said.

In November, ‘vegetables’ inflation dropped to 29% from 42% in October, which pulled down overall food inflation, based on the Consumer Food Price Index (CFPI), to a three-month low of 9.04%. ‘Pulses and products’ inflation also declined to 5.41% in November from 7.43% in October, but ‘oils and fats’ inflation rose to 13.28% from 9.51%.

According to economists, food inflation is likely to decline in the coming months. “Global prices of palm oil have been elevated which has caused this spike (in November). Vegetable inflation should gradually ease as the tomato and onion price shocks get diluted,” said Madan Sabnavis, chief economist, Bank of Baroda.

Sabnavis added that pulses inflation has moderated and is a fallout of the better tur and urad crops in the market. “Cereals inflation is at 6.9%, but should ease as rice production is expected to be higher than last year and mandi arrivals have been smooth so far.”

India Ratings and Research (Ind-Ra) expects CPI inflation around 5% in December. “A higher base effect of pulses, fruits, vegetables and spices inflation will be helpful in further decline in inflation in December 2024, which we expect to be around 5.0%. However, edible oils and personal care & effects may pose some challenges,” it said.