Retail inflation at 16-month high: RBI likely to go for yet another rate cut despite CPI breaching central bank's medium-term target

Bengaluru: Retail inflation breached the central bank’s medium-term target of 4 percent in October for the first time in 15 months, on the back of higher food prices.

Most economists, however, expect the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) to look past the inflation data and cut rates for a sixth straight time next month with economic growth and industrial output sagging to six-year lows.

Annual retail inflation rose to 4.62 percent in October, according to data released on Wednesday, up from 3.99 percent in September, and higher than the 4.25 percent forecast in a Reuters poll of analysts.

Representative image. Reuters.

Siddharth Sanyal, chief economist and head of research, Bandhan Bank

“Despite today’s uptick, largely due to a temporary rise in food prices, inflationary pressures broadly still remain very much under control and the growth momentum continues to be very weak. So today’s inflation numbers should not jeopardise the RBI’s accommodative stance,” said Sanyal.

“The numbers may create some uncertainty in the market over the next few days given the spike in the headline inflation number. But considering all factors, one more rate cut by the RBI in December remains reasonably likely. Another rate cut beyond that should not be ruled out,” he said.

“We haven’t seen this kind of a spell of benign inflation on average for a long time. Generally, the RBI is much more comfortable now on the inflation front, and given the sharp weakness on the growth front of late, the RBI cannot focus on inflation alone.”

Aditi Nayar, principal economist, ICRA

“Looking ahead, we expect the core-CPI inflation to inch up modestly from the level recorded in October 2019, but not breach 4 percent. The pace of normalisation in vegetable prices will be the key driver of the trend in food inflation over the next few months,” says Nayar.

“Overall, the CPI inflation may continue to print higher than 4 percent in the remainder of FY2020, complicating policy choices in light of the slowdown in economic growth momentum,” she said.

“In our view, the extent to which the Q2 FY2020 GDP growth reading eases further from the 5 percent recorded in the previous quarter, will influence the MPC’s decision on whether to cut rates further, and by how much, in the December 2019 policy review.”

Rahul Gupta, head of currency, Emkay Global Financial Services

“For the first time in 15 months, inflation print has exceeded RBI’s medium-term target of 4 percent. October CPI has increased to 4.62 percent from 3.99 percent in September, and has surprisingly came in at more than what the market was expecting,” Gupta said.

“This sharp rise was especially due to an uptick in food prices amid erratic monsoon. Despite rising inflation, we expect RBI to continue its easing cycle on the back of sluggish growth and weak core inflation and cut repo rate at the December meeting,” he said.

Devendra Pant, chief economist, India Ratings 

“Although headline CPI inflation in October 2019 has breached central point of RBI’s inflation targeting framework, the increase is due to seasonal items and strong base effect,” Patil says.

“With economic growth slowdown, India Ratings and Research believes growth concerns will dominate in RBI’s monetary policy review and RBI to continue with accommodative policy and expect further rate cut in the policy review of December 2019,” he says.

Vidya Bala, co-founder, Primeinvestor.in

”The increase is steadily seen in the food component of consumer inflation. Having crossed the RBI’s mid-point of 4 percent, one needs to see whether this trend is only temporary or if it will creep up further,” said Bala.

“While the central bank may start taking note of this uptick, there are more concerning factors such as the IIP (Index of Industrial Production) being at an eight-year low. So one would have to worry more about growth at this stage rather than the rising inflation,” he said.

Anagha Deodhar, economist, ICICI Securities 

“We expect CPI to remain above 4 percent for the remaining five months of the fiscal. It could touch as high as 4.6 percent in January-February 2020 before moderating to 4.3 percent in March. The current level of inflation indicates weak demand in the economy,” said Deodhar.

“Growth concerns have become far more important than inflation in the current context. We expect growth in Q2FY20 to come in at ~4.5 percent which would be a big concern. Although inflation is increasing, it is still comfortably within the RBI’s target range. So, it’s unlikely to give inflation much importance in the December review,” she said.

“We expect growth to fall to ~4.5 percent in Q2. Also, the pick up in growth in H2 is likely to be lower than previously thought. Hence, growth in FY20 could come between 5.5 percent and 5.7 percent.”

“More rate cuts are definitely on the cards, especially given the weak growth outlook. I expect a large rate cut in December followed by one more rate cut in early 2020.”

Rupa Rege-Nisure, chief economist, L&T Finance Holdings 

“This was expected given the spikes in vegetables, meat & fish and egg prices due to disruption in transportation caused by excessive and unpredictable rains. Inflation in pulses too is on the higher side due to demand-supply mismatch,” Rupa said.

“However, core inflation has collapsed to 3.44 percent in October versus 4.01 percent in September due to broad-based weakness in demand. While the RBI will continue to provide comfort on the liquidity front, it makes sense to take a pause in the rate cutting cycle.”

“The need of the hour is to boost investment confidence at the individual sector level through corrective measures and a fiscal boost. India needs to focus on growth and arrest the deflationary trends.”

Madhavi Arora, economist, Edelweiss Securities

“We think the current underlying growth-inflation mix continues to be favourable for counter-cyclical monetary stance,” Arora said.

“The domestic demand state, as reflected in various activity indicators, has weakened further in recent months, while fragile external growth backdrop convolutes the domestic slowdown further. We think the monetary accommodation has further steam of 50-65bps cut more in the cycle, contingent on data outcomes,” she said.

“We will closely watch out for the evolution of inflation amid various domestic and global idiosyncrasies, and fiscal fragilities that could impact the MPC’s reaction function.”