Foreign banks diverge on RBI’s rate path as inflation hits 14-month high

Foreign banks are sending mixed signals on the likely approach of the Reserve Bank of India’s Monetary Policy Committee (MPC) regarding its rate stance at the upcoming December 4-6 meeting.

This is more so after retail inflation reached 6.2 per cent in October 2024, the highest in 14 months and outside the 6 per cent upper band of the Reserve Bank of India’s tolerance limit. 

The MPC December decision hangs in the balance between the outlook on growth and inflation.

Given the firm retail inflation, the case for a rate cut is not clear, but economists at foreign banks said RBI cutting rates to support a slowing economy is not out of the question. The Reserve Bank of India (RBI) has kept its policy rate unchanged since February 2023. 

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Following the latest CPI reading, DBS Bank Executive Director and Senior Economist Radhika Rao has stated that the MPC’s rate cut is unlikely for the December meeting. However, Barclays Research Regional Economist Shreya Sodhani still anticipates a rate cut in December, though she acknowledges it is now a very close call.

Barclays Research feels RBI may cut rates in December to support economic growth.

Rao highlighted that in October 2024, inflation rose 6.2 per cent year-on-year, registering the fastest pace of rise in over a year. The reading was above the 4 per cent mid-point and the target range of 2-6 per cent. 

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“Firm inflation, hawkish speak from the central bank and heightened global volatility confirm that rate cuts are off the table in December, “ Rao said.

Nonetheless, October’s print marks a peak in this cycle, and food costs will moderate as Kharif supplies return to the market, she said. 

Rao added that the next data of interest will be July-September 2024 GDP growth numbers, due at the end of November. This is expected to reflect the recent slowdown in high-frequency activity indicators. 

“We see a window for rate cuts in February contingent on market stability, cool off in inflation and more evidence of a cyclical slowdown,” Rao said. 

Meanwhile, Sodhani said the 6 per cent plus print for October, even if mostly driven by vegetables, complicated the picture for Barclays’ forecast of rate cuts starting in December. The optics and communications will be difficult, especially as Governor Shaktikanta Das remains hawkish. 

“But the slowing in growth below potential provides a rationale for the central bank to ease monetary conditions —to support growth,” Sodhani added. 

This is particularly true considering (1) the favourable outlook for inflation to align towards the 4 per cent target from Q4, as per the RBI’s forecasts and (2) the lag in the transmission of monetary policy (3-4 quarters), amid the slack in private investment, she noted. 

By the December meeting, the MPC will have high-frequency price indicators for November and growth indicators for October, she said. “We expect Q2 GDP growth to slow to 6.2 percent y/y. In our view, slowing urban demand and weakness in exports could continue to weigh on growth. We therefore reduced our growth forecast for FY25 to 6.8 percent (from 7.0 percent earlier) and think the RBI will also need to lower its 7.2 percent growth forecast at the December meeting. The policy decision will then hinge on which way the MPC sees risks - for higher and persistent inflation, or weaker demand risks,” Sodhani said. 

Currently, India is facing a slight macro problem, with inflation printing higher than expected and economic growth likely to be lower than expected (Q2 GDP data release on November 29).

At the upcoming December MPC meeting, the RBI is widely expected to revise its downward growth outlook while raising its inflation forecast for the current fiscal year.