India's Retail Inflation Hits Nine-Month High: Key Insights

Retail inflation in India rose to its highest level in nine months during September, primarily due to increasing food prices and a challenging base effect. The Consumer Price Index (CPI)-based annual retail inflation surged to 5.49%, a notable increase from 3.65% in August and surpassing economists' expectations of 5.04%.

RBI's Outlook

In its October monetary policy review, the Reserve Bank of India (RBI) projected that inflation would gradually decrease, averaging 4.5% for the fiscal year 2024-25. While the RBI decided to keep the repo rate unchanged, it maintained a neutral policy stance. However, the significant rise in retail inflation for September has led some economists to push back their predictions for interest rate cuts to the first half of 2025. Other experts suggest that the Monetary Policy Committee (MPC) might avoid making hasty decisions, with December 2024 being seen as a more suitable time for reassessing policy easing.

Repo Rate Cut Expectations

Aditi Nayar, Chief Economist at ICRA, noted that the sharp increase in CPI inflation for September 2024 has reduced the likelihood of a rate cut during the December 2024 meeting. She emphasized that for a rate cut to happen then, CPI inflation would need to drop significantly below 5.0% in upcoming reports, or GDP growth for Q2 FY2025 would have to fall short of the MPC's expectations.

Economic Factors Influencing Inflation

Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, believes that food inflation will keep the MPC cautious, especially with ongoing global risks. However, she noted that favorable conditions such as a strong kharif harvest and high reservoir levels could help bring inflation down to around 4.0–4.5% by the end of FY25. Despite this, near-term risks are likely to maintain caution among MPC members.

Wait-and-Watch Approach

Madhavi Arora, Lead Economist at Emkay Global Financial Services, expects the RBI to adopt a wait-and-watch approach due to various global and domestic factors affecting inflation. She indicated that while weaker activity data could exert downward pressure on core prices, food inflation remains unpredictable.

Global Economic Considerations

Despite the US Federal Reserve's recent rate cuts, surprises in US growth, labor market, and inflation may raise the possibility of a prolonged period of higher rates. This, coupled with risks related to the US-China trade war, could increase global volatility and affect the RBI’s decision-making process.

Future Rate Cut Projections

UBS Chief India Economist Tanvee Gupta Jain anticipates a 75 basis points cut in the repo rate during this cycle but emphasizes that the MPC will rely on data to determine the timing of any rate cuts. For a rate cut to begin in December, either inflation must significantly fall below 5% or growth must decline unexpectedly.

Radhika Rao, Executive Director and Senior Economist at DBS Bank suggests that the MPC will take a forward-looking approach when deciding on rate cuts, considering GDP performance in the July-September period ahead of the next policy review.

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She expects the strong end to the monsoon season to positively impact harvests and help moderate food prices toward the end of 2024, supporting the central bank’s shift towards easing monetary policy

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