Will higher CPI inflation projection make D-Street’s wait for rate cut longer?
inflation projection for the current fiscal by the Reserve Bank of India (RBI) on Thursday, while highlighting the global economic conditions, has dashed Dalal Street investors’ hope of a rate cut any time in the near future. Until the last policy meet, expectations were building for a longer pause and possibly, a rate cut later in FY24.
However, the tweak in inflation projection has now pushed rate cut expectations to FY25. While leaving the repo rate unchanged at 6.50% and retaining the policy stance of staying focussed on the withdrawal of accommodation came as no surprise to the market, RBI’s sharp hike in inflation estimate and the imposition of incremental Cash Reserve Ratio of 10% on banks took Dalal Street bulls off guard.
The RBI now sees the consumer price index-based inflation at 5.4% for 2023-24, against 5.1% earlier, in the backdrop of the sharp rise in vegetable prices. “A substantial increase in headline inflation would occur in the near term… Uncertainties remain on the domestic food price outlook,” Governor Shaktikanta Das said.
Since June, prices of tomatoes have increased by more than 5 times. Meanwhile, crude oil prices have inched above $80 a barrel after hovering at around $74 a barrel in May.
The CPI for July is, therefore, estimated to move back above the upper end of the 2-6% tolerance band of the central bank to 6.2%. “Proactive government measures to curb food inflation should assist in keeping inflation lower, but RBI is likely to stay on hold for the rest of CY2023,” said Deepak Agrawal, CIO — Fixed Income, Kotak Mahindra AMC.Global ImpedimentsOn the domestic front, higher vegetable prices and potential El Nino conditions have created upside risks to inflation, while globally, the easing of
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