Retail inflation, for the month of September 2024, is reported to have surged to 5.49% thus fueling further doubts over the RBI cutting interest rate in December.
India’s retail inflation for September 2024 had reached a 9-month high of 5.49%. Hiked rapidly by 3.65% in August, any data much over 5% in such series tends to raise apprehensions whether the Reserve Bank of India would cut its key rate at the its December meeting of Monetary Policy Committee (MPC).
High Food Prices And Spurt In Vegetable Prices
Food inflation rose to 9.24% in the rounds for September from 5.66% seen in August, while prices of vegetables had posted the highest rate of growth at 48.73%. Prices of potatoes and onions grew by 78%, three times the RBI’s stated ideal for overall inflation of 4%. Therefore, the RBI will be looking keenly towards the series of rate cuts it had initiated some time ago when considering further rate cuts.
Higher inflation may delay the much-awaited repo rate cut and loans will get cheaper with possible cut in interest rates across the nation. Cut in repo rate at 6.5% may reduce the equated monthly installments of home, car and education loans. The RBI has recently shifted its monetary policy stance to “neutral”, signaling a future cut, but even now persistent inflation may delay the move.
Governor’s Cautious Approach :
RBI Governor Shaktikanta Das pointed out that persistent food inflation remains a big headwind to seeing some form of deflation. RBI, in its last pre-policy statement, had forecasted GDP growth to 7.2% in FY25 – one of the highest among major global economies – but might await further fall in inflation to decide upon a monetary cut.
Economists discuss risks of inflation as subsequent cuts feature in the discussion
While the surge in India’s retail inflation led economists to delay their expectations for an uptick in domestic deficit until the first half of 2025 and reverse earlier signs of cuts in December, CitiBank economists noted that even with a shift in RBI’s ‘neutral’ stand, risks in the inflationary cycle are unlikely to force an earlier rate cut in December, reported Reuters news agency. They are now predicting cuts could come by January 2025. The average price increase of 4.5% in the monetary policy committee meeting scheduled in February is also expected to prevail till April. Similarly, JP Morgan shifted its expectation of a rate cut to February, provided the inflation is not going to ease later than October.
RBI’s Policy On Inflation
The RBI kept interest rates at 6.5% for the 10th session but believed the central bank will wait for more visible signs of inflation resurfacing itself before it cut the rate. RBI Deputy Governor Michael Patra said that the central bank would “look into” the upcoming inflation while taking a decision. Governor Shaktikanta Das also said that the time to cut the rates cannot be said with certainty since it is premature in the view of ongoing risks.
