Retail inflation in India rose to 5.49% in September 2024, a 9-month high that rose sharply to 3.65% in August. The rise, driven by rising food prices, raised doubts over whether the Reserve Bank of India would cut rates at its December Monetary Policy Committee (MPC) meeting.
High food prices and rising vegetable prices
Food inflation rose to 9.24% in September from 5.66% in August. Vegetables saw the biggest increase, with prices rising by 48.73%. Prices of potatoes and onions rose by 78%, exceeding the RBI’s target of 4% for overall inflation.
Rate cut prospects under scrutiny
Higher inflation could push back the long-awaited repo rate cut, pushing loan interest rates down across the country. The rate cut from the current 6.5% could bring down EMIs on home, car and education loans. While the RBI recently shifted its monetary outlook to “neutral”, indicating a possible future cut, persistent inflation could delay the move.
Governor's cautious approach
RBI Governor Shaktikanta Das has emphasised that persistent food inflation is a major obstacle to deflation. Though the RBI forecasted GDP growth of 7.2% in FY25, one of the highest among global major economies, Das may wait for inflation to fall further before deciding on a monetary cut.
Economists talk about inflationary risks due to subsequent cuts
In September, a sharp rise in India’s retail inflation prompted economists to delay expectations for a domestic deficit until the first half of 2025, which reversed earlier predictions of a cut in December.
According to the news agency Reuters, CitiBank economists observed that despite the change in the Reserve Bank of India's (RBI) 'neutral' stance, risks in the inflationary cycle are unlikely to force the December rate cut. They are now forecasting that rates could be cut by January 2025. The average price increase of 4.5% at the Monetary Policy Committee (MPC) meeting in February is likely to last until April. Similarly, JP Morgan pushed its expectations for a rate cut to February, contingent on inflation easing after October.
RBI’s approach to inflation
The RBI recently kept interest rates at 6.5% for the 10th session, but economists believed the central bank may wait for clearer signs of rising inflation before considering a rate cut. RBI Deputy Governor Michael Patra suggested that the central bank would “look into” the impending inflation before taking a decision. Governor Shaktikanta Das also stressed that it is premature to determine the timeline for reducing the rates given ongoing risks.
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