Easing core inflation raises chances of RBI rate cut in April

INDIA-ECONOMY/RATES [File] A man checks his phone outside the Reserve Bank of India headquarters in Mumbai | Reuters

The Reserve Bank of India sprang a surprise on February 7, when it cut its benchmark repo rate by 0.25 per cent (25 basis points) to 6.25 per cent in the bi-monthly monetary policy committee (MPC) meeting. Now, a further fall in retail inflation, and core inflation also easing, has raised chances that the MPC will reduce the repo rate by an additional 0.25 per cent, in the next policy meeting in April.

Government data shows that inflation-based on the consumer price index (CPI) cooled further to a 19-month low of 2.05 per cent in January, versus 2.11 per cent in December and 5.07 per cent in January of 2018.

Retail inflation has been on a downward trend over the last several months, mainly driven by lower food prices. More importantly, core inflation (excluding fuel and food prices), which had remained sticky at close to 6 per cent in October has also declined to 5.4 per cent last month.

After the surprise repo rate cut by the MPC this month, many economists had predicted one more rate cut some time this year. Now, easing core inflation has increased chances of a rate cut coming in the next MPC meet in April.

“The exceptionally low inflation rate has brightened chances of a rate cut in the upcoming monetary policy in April,” said Anagha Deodhar, economist at ICICI Securities.

The MPC in the last policy meet revised its CPI inflation projections downwards to 2.8 per cent for the fourth quarter ending March, 3.2-3.4 per cent for the first half of 2019-2020 and 3.9 per cent for the third quarter of next year.

Due to the surprisingly low inflation in January, the actual inflation in the fourth quarter is likely to be lower than the 2.8 per cent forecast, thus prompting the MPC to cut rates again in April, said Deodhar.

Sujan Hajra, chief economist at Anand Rathi Financial Services also said that headline inflation in January belied expectations. Hajra expects food inflation to rebound in March, but inflation in house rents and fuel is likely to remain low, thus keeping the overall inflation at a modest 4 per cent.

While inflation has been low, India’s industrial production growth has remained benign. The factory output measured in terms of the index of industrial production (IIP) grew 2.4 per cent in December 2018, higher than the 0.3 per cent growth in November, but still significantly lower than the 7.3 per cent in December 2017. This could also influence a rate cut.

Under governor Urjit Patel, RBI’s foremost focus had been on keeping inflation in check. For his successor Shaktikanta Das, economic growth also seems to be equally important. “The primary objective would be to maintain price stability while keeping in mind the objective of growth,” he said in an interaction with reporters after the MPC meeting last week.

“January retail inflation is lower than the RBI’s forecast. Although, seasonal trends suggest that inflation has bottomed out, the present low levels and subdued industrial growth point towards another 25 bps rate cut by the RBI at its April policy meet,” said Hajra of Anand Rathi.

Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, feels inflation will remain benign in the near-term, and any further monetary policy action will depend on how the inflation evolves and growth dynamics pan out.

“Softer-than-expected January CPI print reaffirms our view of a 25 bps cut in April,” said Bhardwaj.

However, inflation is likely to edge over 4 per cent in the second half of the next financial year and there are various upside risks from volatility in food and fuel prices, monsoon uncertainty, possible fiscal slippages and high core inflation, and in this backdrop the MPC would be constrained to cut rates aggressively, she added.