India CPI inflation eases: Can RBI reconsider its interest rates stance? How could market react to September CPI?

India’s retail inflation rose by 5.02 per cent in September against 6.83 per cent in August, according to the data released by the Ministry of Statistics on Thursday, October 12.

Also Read: India’s retail inflation eases to 5.02% in September, comes within RBI’s tolerance mark after two months

Most experts expected retail inflation to be in the range of 5.3 per cent to 5.5 per cent as they pointed out a significant decline in select food items.

The recent drop in inflation to a three-month low is a significant positive development on the macroeconomic front. Notably, the September CPI inflation rate at 5.02 per cent is below the upper threshold of the RBI’s acceptable range of 2 to 6 per cent.

Can the RBI go for interest rate reduction sooner than expected?

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Futile to expect a rate cut in FY24

Experts highlight that the likelihood of a rate cut in fiscal year 2024 is extremely low, given the dynamic geopolitical circumstances and variables such as the potential impact of El Nino on the winter crops (rabi crops).

While the Russia-Ukraine war is still on, the Israel-Hamas war has made crude oil prices volatile. The trajectory of crude oil prices will be a major factor that will determine domestic inflation.

Besides, the monsoon season concluded with a deficit and with a significant fall in water storage in the major reservoirs as compared to long period average. Hence, the rabi crop may be impacted.

A majority of experts believe that the RBI will keep interest rates unchanged in the current financial year and a rate cut could occur in 2024 only if the global economy weakens.

Further, experts hold the view that the RBI is likely to reduce interest rates only after the US Federal Reserve makes a rate cut since domestic economic growth might experience some weakening, but it may not weaken significantly enough to justify rate cuts beforehand.

Apart from these factors, we also need to keep in mind that the RBI wants inflation to be near 4 per cent and not just in the range of 2-6 per cent. In his speech after the latest monetary policy meeting, RBI Governor Shaktikanta Das emphasised that the central bank was targetting inflation to be at 4 per cent and not just maintaining it between 2-6 per cent. This is going to take time.

“With uneven monsoon and several states reporting a possibility of a sub-par kharif crop, the food inflation outlook remains grim. While 5 per cent is reached, the task downhill to 4 per cent will remain a challenge in the near future,” said Anitha Rangan, Economist, Equirus.

Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers believes the reduction in inflation would reassure the Reserve Bank of India and validate the central bank’s decision to maintain its recent stance of unchanged policy rate.

However, Hajra pointed out that even at this level, retail inflation remains significantly higher than the RBI’s stated monetary policy target of 4 per cent. This, coupled with the robust performance of industry and infrastructure, indicates that a rate reversal is not imminent.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services believes that the Monetary Policy Committee (MPC) will opt for a pause for the rest of FY24 and go for a rate cut in the second quarter of the calendar year 2024.

Dipti Deshpande, Principal Economist at CRISIL expects the RBI to stay vigilant since headline inflation remains much above the Monetary Policy Committee’s 4 per cent target and risks are tilted on the upside due to the flare-up in crude oil prices.

“For this fiscal, in the base case, we expect inflation to average 5.5 per cent and expect the MPC to maintain policy rate and stance,” said Deshpande.

The impact on the market

Experts believe a significant drop in CPI inflation is likely to have a positive impact on the market. However, it is unlikely to give a sharp boost to market sentiment since a moderation in inflation was widely expected.

“Stock markets may be indifferent to the inflation number despite coming lower than expected. The RBI may wait for a couple of more months’ trajectory of inflation before deciding to cut rates. For the moment it seems that a pause is most likely in the next RBI meet,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

Akhil Mittal, Senior Fund Manager- Fixed Income at Tata Asset Management observed that the core inflation has come off further at 4.5 per cent and this bodes well for future inflation expectations and also provides comfort to RBI with respect to the probability of meeting the inflation trajectory.

“I think this would be positive for markets and provide a breather to yields, which were headed higher since the MPC review and were further fueled by geopolitical developments,” said Mittal.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Updated: 12 Oct 2023, 10:32 PM IST