Slight increase in CPI inflation may not deter RBI from its rate-cut spree

Even as the CPI inflation inched up to 0.7 per cent in November from the record low of 0.3 per cent in October, it is not likely to deter RBI from its stance of rate-cuts. If all goes well, we may see a further round of cut in key policy rates by 25 bsp when the RBI’s Monetary Policy Committee reviews annual monetary policy for the last bimonthly in February.

The uptick was largely led by the narrowing deflation in the food and beverages segment, even as core inflation eased marginally between these months.

Core inflation eased slightly to 4.4 per cent on MoM, with the impact of the GST rate rationalisation and limited sequential uptick in gold prices restricting the MoM uptick to just 0.1 per cent in the month. Core CPI inflation excluding gold eased to 2.6 per cent.

A continued base-normalisation and the hardening in prices of some vegetables could make the headline CPI inflation cross 1.5 per cent in the next print, which will be the last before the next MPC. The evolving inflation-growth outlook, as well as the fiscal policy measures unveiled by forthcoming Union Budget, as per Icra, will guide the MPC's next decision.

The uptick in retail inflation was due to the fading favourable base from last year and a seasonal rise in prices of certain food items, which narrowed the deflation within the food basket. Overall, food inflation is expected to remain at moderate levels, as per CareEdge, supported by healthy agricultural activity and a favourable base. Adequate reservoir levels should also aid rabi sowing this year.

Looking ahead, headline inflation appears to have bottomed out in October but is expected to remain well below the RBI’s 4 per cent threshold for the remainder of the year. The upcoming introduction of the new CPI series will be an important development to monitor.

From a monetary policy perspective, the recent rise in inflation is unlikely to be a concern for RBI. Even though there is scope for another 25 bsp rate cut based on the inflation projection.

Given the negative domestic inflation, current reading of CPI, as per Ecowrap, does not reflect the build-up of inflationary pressure due to imported inflation. Also, inflation is expected to rise further given the depreciation in rupee.

For the current quarter, inflation is averaging 0.5 per cent, broadly in line with the RBI’s projections. Looking ahead, Anand Rathi expects CPI to rise moderately due to firmer sequential food prices and the fading base effect.

The central bank has steadily pared back its inflation forecast over the course of the fiscal year while raising its growth projections in successive MPC meetings.

While the RBI may adopt a wait-and-watch approach following the latest rate cut, the softer CPI backdrop gives the central bank room to remain growth-supportive, with the possibility of an additional 25 bsp cut later in the cycle.