Amid economic slowdown, rising inflation knocks down hopes of RBI rate cut in February

Last December, the RBI chose to give rate cuts a pause, which Governor Shaktikanta Das termed was temporary, but it now appears the wait just got longer.

Published: 15th January 2020 09:40 AM  |   Last Updated: 15th January 2020 09:58 AM   |  A+A-

RBI

Reserve Bank of India. (File Photo | PTI)

Express News Service

HYDERABAD: Rising inflation has knocked down hopes of a policy rate cut next month.

Last December, the RBI chose to give rate cuts a pause, which Governor Shaktikanta Das termed was temporary, but it now appears the wait just got longer.

However, the anticipation isn’t really about the central bank slashing benchmark rates, but whether it will shift its stance to ‘neutral’ (which gives rate cuts or hikes an equal chance) from the current ‘accommodative’ stance.

There are enough reasons for RBI to do so. Headline inflation shot up to 7.35 per cent in December, the highest since July 2014, while wholesale food inflation accelerated to 13.24 per cent from 11.08 per cent.

Yet, monetary policy proponents argue that the price rise solely led by onion, garlic and potatoes is transient and minus the trio, inflation was at a bearable 4.48 per cent. Hence they believe rate cuts will come in April, if not in February.

“We think monetary accommodation still has further steam of another 50 bps in this rate cut cycle, albeit the timing of the same is a tad tricky. For now, a February cut appears ruled out,” said Madhavi Arora, lead economist with Edelweiss Securities.

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Others, however, believe that inflation will persist above the MPC’s target of 4 per cent for a longer period due to volatile global crude prices, affect of domestic telecom tariff hikes and firming up commodity prices.

In other words, rather than rate cuts, MPC may be forced to adopt a neutral policy stance, sooner or later.

At 7.5 per cent, both retail inflation and FY20 nominal growth printed at the same pace, which is a first in at least eight years.

Besides, the chasm between inflation and core inflation widened and is now the highest since May 2013.

Real rates have turned negative at 220 bps and the possibility of fiscal slippage in FY20 is a signal that the rate easing cycle has come to an end.

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“We believe that it will be too soon for RBI to change its stance to ‘tightening’ as inflation is more or less transient in nature amid the wide output gap,” said analysts at Emkay Global. 

According to Devendra Pant, chief economist, India Ratings, RBI’s job is complicated due to the slowdown given its objection to support growth, but rising inflation leaves little room to tinker with policy rates.

“Under such circumstances, all eyes are now on the forthcoming Budget,” he concluded.

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