Cooling inflation may soften RBI rate hikes

Mumbai: A sharp fall in the Consumer Price Index (CPI) in October and expectations that prices have eased from their peak levels could limit interest rate increases by the Reserve Bank of India (RBI), although volatility in local food prices and unpredictability of global interest rates, especially of the US Federal Reserve, continue to pose risks. CPI for October fell to 6.77%, from 7.41% a month earlier, largely due to softer food prices, even as it remained above the 6% outer tolerance band of RBI.

Economists said consumer prices appear to have peaked and are likely to ease from here, though core inflation remains elevated.

If inflation continues to wane and the pressure on the rupee eases, it will give RBI room to put an end to its rate hike cycle which started in May.

“Signs of a peak in inflation and lower incremental depreciation pressures on the currency increase the likelihood that RBI might dial down the scale of the hike in December to 35 basis points, after three consecutive 50-basis point increases, and the tightening cycle peaking in early 2033, ahead of the US Fed,” said Radhika Rao, senior economist, DBS Bank.

Sub-7% Inflation

RBI has increased its benchmark repo rate by 190 basis points since May as inflation has been above 6% for 10 consecutive months.
Earlier this month, the central bank, as mandated by the RBI Act, wrote to the government explaining why it had failed to keep prices in check and what it will do in the future.

Some economists said that though inflation is unlikely to increase to 7%, sticky food prices and uncertainty of the trajectory of future US rate hikes will force RBI to be on guard.

“We still expect a 50-basis points hike in December,” said Indranil Pan, chief economist, at

. “Our forecast is for inflation to be around the 6.50% mark in the fourth quarter of the fiscal, higher than the 5.80% projected by RBI. Also, after having to explain to the government so recently, it is unlikely RBI will lower its guard.”

Pan said RBI is still lagging the US Fed, having hiked rates by 190 basis points, compared to 300 basis points in the US so far.

The drop in consumer prices was also accompanied by a fall in the Wholesale Price Index (WPI), which fell to a 19-month low of 8.39% in October on easing prices of food, fuel and manufactured items.

Garima Kapoor, economist at Elara Capital, said the downtrend in wholesale inflation bodes well for retail inflation, with moderation likely to get passed on to the retail side, ultimately softening consumer prices.

“Non-crude oil commodity price correction and seasonal softening in food prices during winter months are expected to be key tailwinds for inflation in the second half of 2022-23,” said Kapoor. “However, the recent upsurge in crude oil prices and lingering risks to supply chains due to geopolitical risks remain key headwinds. We also remain watchful of the trajectory of food inflation to assess if unseasonal rains in October disrupt the expected disinflationary impulses that play out in winter months.”

Elara Capital expects repo rate to be hiked by another 40-50 basis points in this fiscal.

HSBC economists Pranjul Bhandari and Aayushi Chaudhary expect RBI’s attention to tip towards growth, from inflation, particularly as India’s GDP growth is expected to soften over the next few quarters on the back of slowing global growth expectations.

“We believe the December hike could be the last one for now. We expect a 50 basis points increase in the December policy meeting, taking the repo rate to 6.4%. This, we believe, is necessary to lower inflation and restore external balances,” Bhandari and Chaudhary said in a note.