Thought your home loan interest rates will start coming down soon? Unfortunately, several economists don't see it coming at least till December, and you can blame food inflation for that.
The Reserve Bank of India's monetary policy committee (MPC) on Thursday left its repo rate unchanged at 6.50 per cent for the ninth consecutive time. The MPC stressed that persistently high food inflation could have spillover effects and the MPC could no longer look through this given the environment of persisting high food prices.
While it retained its full-year CPI (consumer price index) inflation forecast at 4.5 per cent, it has raised its inflation forecast for the July-September quarter significantly to 4.4 per cent from 3.8 per cent.
"While the moderation in core inflation is a positive, the RBI looks increasingly uncomfortable with the high level of food inflation," noted Aditi Gupta, economist at Bank of Baroda.
India's economy is expected to remain strong, even amid global economic and geopolitical concerns; the RBI has retained its GDP growth forecast at 7.2 per cent for 2024-25. Given that growth is not an issue, the central bank can in turn continue to focus on the inflation issue at hand, say economists.
"Buoyant growth outlook gives RBI to keep rates elevated till such time that it feels that inflation has subsided on a durable basis," said Gupta.
She doesn't expect the central bank to cut interest rates before December this year, given the outlook on food prices, especially vegetables.
Rajani Sinha, chief economist at CareEdge Ratings believes that food inflation is expected to moderate with normal monsoon, but healthy temporal and spatial distribution of rainfall will be critical. With the central bank cautious on inflation, like Gupta, Sinha also is not expecting any rate cut at least till December.
"Achieving RBI's target of 4 per cent inflation on a durable basis looks challenging, even going by RBI's quarterly inflation projections. However, with core inflation benign, the central bank could look at a shallow rate cut towards the end of the calendar year or first quarter of next year, provided food inflation moderates and RBI has comfort on overall CPI inflation moving towards 4 per cent target," said Sinha.
Indranil Pan, chief economist at Yes Bank feels the RBI was a "tad" more hawkish than the previous MPC meeting, "probably to firmly establish in the minds of the market that it should not expect any rate cuts soon."
"In this context, the RBI clearly indicated that there is still a distance to cover to align inflation with the 4 per cent target," he noted.
While RBI will be watchful of food prices, one perhaps will also have to keep a watch on the moves of the US Federal Reserve. The Fed has signalled that it may cut interest rates in September. After an extremely weak jobs data that came out last week, there are growing recessionary concerns and some now feel the Fed could even cut rates by 50 basis points when it meets next month.
Suman Chowdhury, executive director and chief economist at Acuite Ratings feels the narrative in the latest RBI policy lowers the possibility of a rate cut till December, despite the increased likelihood of rate cuts by the Fed.
Pranjul Bhandari, chief economist, India and Indonesia at HSBC, however, feels food inflation could fall quickly from October onwards, opening up the space for monetary policy easing. But, given that growth is strong, she feels there will be a shallow easing cycle.
"We expect two RBI rate cuts of 25 bps each in the current cycle, one in the fourth quarter of 2024 and the other in the first quarter of 2025, taking the repo rate to 6 per cent," said Bhandari.
Sonal Varma, managing director and chief economist (India and Asia ex-Japan) at Nomura, however, feels the central bank could begin cutting rates as early as October. She noted that their estimates indicate that the RBI's upward revision to July-September quarter CPI inflation may not materialise, since food prices are already reversing in August, and so inflation may surprise lower, relative to RBI's near-term forecast.
"We expect RBI to begin its easing cycle from October with a 25 bps cut, as both inflation and growth surprise on the downside. Past evidence suggests the RBI does not offer any forward guidance ahead of its monetary policy pivots," noted Varma.
She expects the repo rate to fall by 75 basis points to 5.75 per cent by March 2025.
