December Inflation Expected To Stay Within RBI's Tolerance Band, Fuelling Rate Cut Hopes

India's retail inflation is expected to stay within the Reserve Bank of India's tolerance band as seen in November, boosting hopes for a rate cut.

India's retail inflation moderated in November to 5.48%, compared to 6.21% in October, amidst easing food prices. Food and beverage inflation eased to 8.2% in November from 9.69% in October. This was led by vegetable prices cooling to 29.33% compared to 42.18% in the same duration.

"As November's CPI inflation print fell within the tolerance band and the tracker indicates that we are drifting closer to the 4% target by March 2025, we expect the RBI MPC to cut the policy repo rate by 25 basis points on Feb. 7," said economists at Barclays.

Preliminary estimate for December CPI inflation is tracking at 5.8%, after building-in some moderation in food inflation, according to a research note by IDFC First Economist Gaura Sen Gupta. Daily food prices for the first two weeks of December, indicate that pace of decline in vegetable prices has slowed, along with lower cereal and pulses prices, according to Gupta, with vegetable prices tracking lower by 1.9% year-on-year in December, compared to a decline of 9.7% in November.

"We continue believe that supply-side measures will be more effective than monetary policy to deal with food inflation," Gupta said, adding that post the disappointment in second quarter's GDP growth, the policy space to remain focused on inflation has reduced.

The central bank anticipates that food inflation will decrease in the fourth quarter due to the seasonal drop in vegetable prices, kharif harvest arrivals, and good soil conditions that should support rabi production. The RBI forecasts CPI inflation of 5.7% for the third quarter and 4.5% for the fourth quarter.

The February MPC will feature mostly new members, including recently appointed RBI Governor Sanjay Malhotra, the outgoing deputy governor Michael Patra, and new external members appointed in October. In mid-January, the MPC will consider the December inflation figures along with advance estimates for fiscal 2025 GDP growth and the Union Budget for the next fiscal.

Economists remain divided of the impact on the weakening rupee and volatile global scenario on the Monetary Policy Committee.

Radhika Rao, economist at DBS said that while the MPC will cut rates by 25 basis points in February and by 75 basis points in this cycle, it will do so keeping an eye on the US dollar and dollar liquidity.

Soumya Kanti Ghosh, group chief economic advisor at the State Bank of India, also expects the same, but believes that the decision is unlikely to be impacted by what could happen to the dollar, as was the case in 2018 when the RBI did not hike rates even as rupee was under enormous pressure.