RBI repo rate cut unlikely in 2024 despite July CPI inflation dropping below RBI’s near-term target of 4%

India’s retail inflation rate based on the Consumer Price Index (CPI) fell to a near five-year low of 3.54% in July from 5.08% a month before, aided by the sharp fall in food prices and a favourable base effect.

The headline inflation has been below the 6% mark since September 2023 and remained within the Reserve Bank of India’s (RBI) tolerance band of 2-6% for 11 consecutive months. Last month, retail inflation declined below the RBI’s medium-term target of 4%.

However, despite a multi-year low inflation rate last month, the Street does not expect an early repo rate cut from the central bank. While the CPI was lower, economists expect it to rise slightly from levels now with core inflation expected to pick up as the impact of the base effect fades.

In its August monetary policy, the RBI raised its inflation forecast for the July-September 2024 quarter to 4.4% from 3.8% earlier.

“The MPC (Monetary Policy Committee) reiterates the need to continue with the disinflationary stance, until a durable alignment of the headline CPI inflation with the target is achieved,” RBI Governor Shaktikanta Das said in his policy speech on August 8.

Rate Cut Hopes

Madhavi Arora, Lead – Economist at Emkay Global Financial Services sees core inflation averaging at around 3.6% in FY25 and not moving above 4% till end-CY24. However, she believes that the RBI is likely to continue to stress on being ‘actively disinflationary’, and maintain a wait-and-watch mode to assess multiple macro forces, unless swinging global winds compel it to focus on financial stability over the 4% inflation mandate.

“We maintain that the US Federal Reserve’s pivot will precede and impact the RBI’s change in stance and rate action, even though the RBI maintains that Fed actions are not a key determinant in their rate actions. As long as the global market turmoil remains contained, there will be flexibility for the RBI to stay focused on domestic inflation and risk management,” Arora said.

Arsh Mogre, Economist at PL Capital - Prabhudas Lilladher, anticipates CPI to stabilize between 4.5% - 5.0% after August, averaging around 4.5% for FY25. According to him, near-term inflation dynamics could be influenced by factors such as telecom tariff hikes, annual MSP adjustments, and potential anomalies in monsoon distribution.

Given these factors and the evolving growth-inflation scenario, he projects that the RBI will not begin its rate easing cycle before Q3 FY25, despite an increased likelihood of a Fed rate cut in September 2024.

Economists at Antique Stock Broking expect RBI to start the rate cut cycle from the October or December policy, only after there are clear signs of food inflation easing given the expectation of above normal monsoon.

“Overall, we expect the repo rate to cool off to 5.75% from the current 6.50% considering FY26 CPI estimate of ~4.25% and ~1.5% neutral rate,” Antique Stock Broking said.

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