Spike in retail inflation, jump in IIP could keep interest rate cut away till mid-2024: Experts

The surge in retail inflation in November to a three-month high along with the sharp growth in factory output in October to a 16-month high is likely to mean that the Reserve Bank of India could cut rates only by the middle of 2024, believe analysts.

Official data released on Tuesday revealed that consumer price index based inflation rose to 5.55% from a year ago in November 2023 after easing to 4.87% in October this year.  The rise in inflation was attributed to food items where retail inflation shot up to 8.02% in November this year with vegetable inflation rising to 17.7% and pulses inflation shooting up to 20.23% last month.

In a welcome surprise, the index for industrial production expanded by 11.7% in October as against a contraction of -4.1% in October 2023. All three sectors of mining, manufacturing and electricity recorded double digit growth.

Experts believe that inflation is likely to remain high even next month at over 5.5% even in December. “With lingering concerns related to prices of some food items, we foresee the December 2023 CPI inflation in a range of 5.6-5.8%. We believe that the policy rates are appropriate at the current juncture and no further tightening is warranted in the near term, unless there is a durable shock to the CPI inflation trajectory,” said Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA Ltd.

Consequently, we expect the MPC to maintain the status quo for the next couple of policy meetings, and foresee a shallow rate cut cycle of around 50-75 basis points, commencing in the August 2024 meeting, she further said.

“The possibility of a rate cut still remains only in the second quarter of next year when inflation comes down to 4%,”said Madan Sabnavis, chief economist, Bank of Baroda, adding that the RBI has projected retail inflation at above 5% till the first quarter of 2024-25. 

In its last meeting held between December 6 and 8, the Monetary Policy Committee of the RBI decided unanimously to keep the policy repo rate unchanged at 6.5%. Noting that the rate action so far is still working its way into the economy, RBI Governor Shaktikanta Das had said, the MPC decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers noted that as stated clearly by the RBI during the December 2023 monetary policy review, the central bank would wait for a sustained decline in inflation and the headline retail inflation rate to converge to the target rate before reversing previous rate hikes.

“The RBI's caution is warranted given the substantially larger weight of food products in India's retail basket and the volatile character of such inflation,” he said. The continuation of robust growth data, like the double-digit above-estimated industrial production number for October 2023 reported today, implies that rate cuts are not required anytime soon, he further said.

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