Rising food prices are likely to push back beginning of rate cutting cycle

In its October meeting, the newly reconstituted monetary policy committee, while keeping the benchmark policy interest rate unchanged, had voted unanimously in favour of changing the policy stance from “withdrawal of accommodation” to “neutral”. The change in stance could have been due to the committee’s “greater confidence in navigating the last mile of disinflation”. This widely anticipated decision, which followed the US Federal Reserve slashing interest rates by 50 basis points in September, was construed by many as opening space for the MPC to begin cutting the policy rate in its subsequent meetings. Some had, in fact, pencilled in a rate cut as early as December. However, inflation data released on Tuesday suggests that the committee is likely to remain cautious in its upcoming meeting.

Data from the National Statistical Office shows that retail inflation surged to a 14-month high of 6.2 per cent in October, up from 5.5 per cent in September. Inflation now exceeds the upper limit of the RBI’s inflation target of 4 plus/minus 2 per cent. Much of the surge in inflation in recent months has been driven by food prices, and within the food category by vegetables, particularly tomatoes and onions. Vegetable inflation rose by 36 per cent in September and 42 per cent in October. Excluding vegetables, headline inflation is considerably lower. Some of this surge in prices was expected. In his comments on the October MPC meeting, RBI Governor Shaktikanta Das had said that the “moderation in headline inflation is expected to reverse in September and likely to remain elevated in the near-term due to adverse base effects, among other factors”.

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However, there are expectations that food price pressures will ease with the arrival of the fresh harvest. The outlook for the rabi crop is also encouraging. The central bank expects food price pressures to ease later in the financial year largely “due to a good kharif harvest, ample buffer stocks of cereals and a likely good crop in the ensuing rabi season”. However, it is possible that the latest inflation data will prompt it to revise its forecast — in October, it had projected inflation at 4.8 per cent in the third quarter and 4.2 per cent in the fourth quarter. At the same time, there are also concerns over the underlying economic growth momentum in the country with some indicators pointing towards a slowdown. While the central bank has projected GDP growth at 7 per cent in the second quarter, and 7.2 per cent for the full year, others expect it to be lower. For instance, Crisil expects growth at 6.8 per cent for the year. On balance, with inflation considerations likely to dominate, a policy pivot is unlikely in the immediate future.