Dec inflation: Some analysts see rate cut from Feb, others yet another pause

The sharp sequential fall in vegetable prices in January is likely to augur well for the food and beverages inflation print for the month, which is expected to ease to five-month low of 6-6.5% from 7.7% in December.
the expected moderation in Prices in coming months, will allow the MPC to consider a policy rate cut amid slowing growth.
the expected moderation in Prices in coming months, will allow the MPC to consider a policy rate cut amid slowing growth.
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Watchers of the Reserve Bank are divided over the impact of falling inflation on the potential for a rate cut next month. Two of them forecast another pause in policy rate cuts, arguing that prices remain stubbornly above the central bank’s comfort level, with inflation at 5.2 percent in December. They also note that the deceleration is slower than expected. Meanwhile, two others see a glimmer of hope for a rate cut in the February meeting.

While Aditi Nayar, the chief economist at Icra Ratings, and an economist at rival agency India Ratings said they don’t see any interest rate action in the next policy review in February, Crisil Ratings and Care Ratings see the second successive fall in consumer prices enabling the RBI-led rating setting panel to go for a first rate cut in two years.

"While CPI declined to 5.2% in December from 5.5% in November, the pace of the correction is narrower than expected. In sequential terms, the dip is  driven by food and beverages, even as on an annualised basis prices of fuel and light, and pan, tobacco and intoxicants mildly ticked up.

“However, the sharp sequential fall in vegetable prices in January is likely to augur well for the food and beverages inflation print for the month, which is expected to ease to five-month low of 6-6.5% from 7.7% in December. Consequently, we estimate the headline CPI to soften to 4.5-4.7% in January from 5.2% in December,” Nayar said.

But this does not give any comfort to the RBI to lower the rates as “the headline inflation is stuck stubbornly above 5%. Given this the probability of a rate cut in the February policy review has certainly receded,” she said, adding the ongoing considerable decline in vegetable prices could convince the MPC to consider an early cut in the upcoming meeting.

Paras Jasrai, a senior analyst at India Ratings, also said, “odds are now tilted in favour of a pause in policy rates yet another time amidst positive inflation data in December.

Though a sustained decline in vegetables, cereals, pulses, and milk helped in keeping the retail inflation to a four-month low in December, this is still higher than the RBI’s target of 4%. Compared to November, of the 23 commodity groups, 12 witnessed a decline in prices in December, he said.

“The February policy will be happening at soon after the budget. The conviction of fiscal arithmetic would also be weighing closely on the monetary policy action. While the current data is positive from the monetary policy perspective, we believe that the monetary authority would want to wait for one more policy before undertaking any change on the rates front,” Jarai said.

Rajani Sinha, the chief economist at Care Ratings, attributed the moderation in December CPI to a slowdown in food prices as vegetable prices dropped to 26.6% in December from 29.4% in November. Vegetable inflation has been a significant contributor to overall CPI in the recent months, averaging  36% since September.

“Though inflationary pressures within the food basket should continue to ease, given our import dependence for edible oil, it would be crucial to monitor inflation in this category amidst high global edible oil prices and the recent hike in import duty on this item. And the expected moderation in prices in coming months, will allow the MPC to consider a policy rate cut amid slowing growth, creating an opportunity for the MPC to consider a 25-bps reduction in policy rates in the February meeting.,” Sinha said.

Similarly, top rating agency Crisil also sees the rate cut cycle beginning next month.

 “A policy rate cut is around the corner and the central bank's easing cycle is expected to begin in February,” Dharmakirti Joshi, the chief economist at Crisil, said, saying the biggest pain points for the economy is not inflation now but liquidity deficit, higher money market rates and weaker rupee apart from the hardening global environment.

“The slowing domestic growth rate has also increased the calls for a rate cut,” Joshi said in a note.

"Food inflation, the main roadblock for rate cuts, is expected to ease given healthy agricultural production," he added.

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