Home SMARTPHONE Inflation rises again: Will this end RBI’s rate cutting cycle?

Inflation rises again: Will this end RBI’s rate cutting cycle?


NEW DELHI: A sharp uptick in inflation for October has put the Indian central bank in a tight spot, and analysts and economists say this rules out another rate cut in the money policy review next month.

Costlier vegetables and eggs pushed up retail inflation to a nearly six-and-a-half-year high of 7.61 per cent in October, keeping it significantly above the comfort zone of RBI. It prefers the dearness in the 4±2 per cent range.

“The inflation rate is indeed worrying. The food price inflation rate saw a double-digit growth of 11 per cent, mainly thanks to rising vegetable prices at 23 per cent. Supply-side issues are bringing pressure on food prices. In such a scenario, RBI might not go for a rate cut in December, and wait till the inflation rate drops back to the comfortable level,” said Deepthi Mathew, Economist at Geojit Financial Services.

In a spate of rate cuts in last two years, RBI has lowered policy rates by 250 bps to prop up the economy. At 4 per cent, the current repo rate is the lowest in history. The central bank’s monetary policy committee (MPC) has also been maintaining an accommodative stance for a while now, which may be difficult to do so if inflation continues to rise, said economists.

“Higher than expected inflation continues to pose a significant challenge for the MPC, raising questions on their commitment to keep the policy accommodative into FY22,” said Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank. “Food prices globally are elevated and we see a risk of a broad based inflation. We continue to remain watchful on food inflation, although core inflation too remains elevated.”

But that does not mean RBI has been rendered helpless. We have already seen the banking regulator has not shied away from using unconventional measures to give a boost to the economy, and that may continue. “[Inflation] may have an impact on the trajectory of interest rates, and RBI may have to continue to focus on liquidity provision rather than rate action,” said Joseph Thomas, Head of Research – Emkay Wealth Management.

It is this indication that is also keeping bond yields in check. Yields on 10-year sovereign bond softened further 0.1 per cent on Friday to 5.89 per cent. It should be noted that yields surged earlier this week after Pfizer announced a successful trial of the Covid-19 vaccine.

Meanwhile, the industrial production in India improved further, indicating a gradual recovery. RBI has also said the contraction in the economy is ebbing with gradual normalisation in activities and expected to be short-lived. But, clubbing it with higher inflation removes scope for carelessness.

“This combination of high inflation, which is among the highest in the world and better growth will make it difficult for policy makers to ease policies further. Going forward, we need to be careful about inflation trajectory,” said Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services.

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