India’s inflation eased last month, while the rupee plummeted to a new record low, giving the central bank reason to remain cautious even as most analysts predict interest rate cuts starting in February.
The consumer price index rose 5.22% in December from a year earlier, data from the Ministry of Statistics showed on Mondayremaining well above the Reserve Bank of India’s 4% target. The median forecast in a Bloomberg survey of economists was that Inflation will slow to 5.3% from 5.48% in November.
The yield on the 10-year government bond had risen seven basis points to 6.85% the previous Monday, and remained unchanged after the inflation data.
Moderating inflation has raised expectations that newly appointed Governor Sanjay Malhotra will cut interest rates in February to support a slowing economy. The RBI has kept interest rates unchanged for almost two years.
However, geopolitical factors such as rising oil prices and the US dollar make it difficult to predict the direction of India’s monetary policy in the coming months. The rupee has fallen to record lows in recent weeks and on Monday plunged below a key psychological level of 86 per dollar.
In addition to a weaker currency, Asia’s third-largest economy, which imports almost 90% of its oil, is also facing higher energy prices, which may increase its import bill. Aggressive US sanctions on the Russian oil industry could force India to source more expensive crude from the Middle East, West Africa or North America.
Food inflation
Food prices, which represent approximately half of the basic consumer price basket, increased 8.39% compared to the previous year, after having risen 9.04% in November. Vegetable prices rose 26.5% from a year ago, compared with a 29.3% increase the previous month.
Excluding volatile food and fuel prices, The basic measure of inflation decreased 3.64%, compared to 3.72% the previous month, according to Bloomberg Economics calculations.
With Monday’s reading, the likelihood of a rate cut in February “has certainly decreased,” said Aditi Nayar, chief economist at Icra. However, declining vegetable prices could convince some members of the monetary policy committee to “consider an early cut at the next meeting, with a view to supporting growth,” he added.
What Bloomberg Economics says
In our view, the central bank needs to significantly reduce rates to begin supporting growth. We expect the RBI to catch up with a 50 basis point rate cut in February, followed by a further 100 basis point easing through 2025. That would take the monetary policy rate to 5.0% for the fourth quarter of this yearsaid Abhishek Gupta, an Indian economist.
