RBI repo rate cuts seen delayed to 2025 as inflation spikes to nine-month high in September

Retail inflation in India surged to a nine-month high in September, primarily driven by rising food prices and an unfavorable base effect. The Consumer Price Index (CPI)-based annual retail inflation climbed to 5.49% in September, significantly higher than 3.65% in August, and exceeding economists' forecast of 5.04%.

The Reserve Bank of India (RBI), in its October monetary policy review, projected inflation to gradually ease, averaging 4.5% for the fiscal year 2024-25. The central bank kept the repo rate unchanged but adopted a neutral policy stance.

However, the sharp rise in September's retail inflation has led some economists to delay expectations for interest rate cuts to the first half of 2025. Meanwhile, other experts anticipate that the Monetary Policy Committee (MPC) will refrain from premature action, suggesting December 2024 as an appropriate time to reassess policy easing.

Repo Rate Cut Expectations

Aditi Nayar, Chief Economist at ICRA believes the substantial rebound in the CPI inflation print for September 2024 has appreciably dampened the possibility of the stance change in the October policy being followed up by a rate cut in the December 2024 meeting.

“For a rate cut to be forthcoming in the December 2024 policy review, either the CPI inflation will need to flatten considerably below 5.0% in the next print or the GDP growth for Q2 FY2025 will need to significantly undershoot the MPC’s expectations,” Nayar said.

Even as the Q2FY25 headline inflation is broadly in line with the RBI’s estimate, Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank believes food inflation will keep the MPC on the back foot, especially as global risks persist.

“Robust kharif harvest, high reservoir levels and expected robust rabi sowing should help inflation to moderate toward 4.0-4.5% from 4QFY25. However, near-term risks are likely to keep most MPC members cautious. The September inflation print and our near-term estimates underscores Dr Patra’s view of the need to tide over the near-term ‘hump’ in inflation,” Bhardwaj said.

She now expects the rate easing to be pushed to H1CY25, unless growth weakens significantly sharper than expected.

Madhavi Arora, Lead – Economist at Emkay Global Financial Services expects RBI to remain on wait-and-watch mode amidst push-and-pull factors.

“The upside risks to inflation could further pressure the RBI, which is already weighing various global and domestic push-and-pull factors before jumping the rate-cut gun. Weaker activity data and existing slack will continue exerting disinflationary pressure on core prices (ex-gold), even as food inflation stays somewhat untamed,” Arora said.

Meanwhile, despite the commencement of US Federal Reserve’s rate cut cycle with a bumper 50 bps cut, the recent upside surprises on US growth, labor market, and inflation may still reignite the underappreciated risk of ‘higher for longer’ scenario. Besides, the event risk of US elections could materially disturb Asian FX dynamics, amid ratcheting up of the US-China trade war, Arora noted.

“All this could add to global volatility, and the uncertainty may weigh on some EM Asian central banks' reaction function, including the RBI, and would mean the aim of financial stability may precede inflation management,” Arora said.

UBS Chief India Economist Tanvee Gupta Jain expects RBI MPC to lower the repo rate by 75 bps in this cycle, but also believes that the MPC would remain data dependent for the timing of the rate cut cycle. 

For policy easing to begin from December either inflation will need to soften well below 5% and/or growth to surprise on the downside, Jain said.

Radhika Rao, Executive Director and Senior Economist, DBS Bank expects the MPC to adopt a forward-looking approach when deciding on the timing of a rate cut, also considering the GDP performance for July-September ahead of the next policy review.

“We expect the strong finish of the monsoon to bode well for the harvest and moderate food prices toward the end of 2024, supporting the central bank’s shift toward easing,” Rao said.

Rupee

The Indian rupee depreciated further, approaching a record low on Tuesday, pressured by weakening regional currencies, elevated domestic retail inflation, and sustained foreign fund outflows, according to analysts.

The rupee was at 84.067 against the US dollar, near its all-time low of 84.0750 hit in the previous session, after weakening below 84 for the first time last week.

According to Jigar Trivedi, Senior Research Analyst - Currencies & Commodities at Reliance Securities, despite the recent decline in crude oil prices this October, the rupee is expected to weaken further, potentially breaching the 84.10 mark—an all-time low.

“Levels of 84.20 to 84.30 should be closely monitored for further upward movement. However, RBI intervention may be on the cards to mitigate excessive volatility and prevent further depreciation of the currency,” Trivedi said.

Amit Pabari, MD, CR Forex Advisors expects the USD/INR to trade between 83.90 and 84.10. However, he believes with the right mix of RBI intervention and favourable global trends, the rupee could inch back to 83.80, marking the beginning of a slow but steady recovery.

Bond Yields

Indian government bond yields barely changed on Tuesday despite a higher-than-expected domestic retail inflation data.

The benchmark 10-year bond yield was trading around 6.7755% as compared with its previous close of 6.7827%.

The sentiment was supported by the sharp plunge in oil prices, which bodes well for future inflation trajectory, analysts said.

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