Economists anticipate that a continued decline in India’s core retail inflation and subdued inflationary pressures might lead the RBI monetary Policy to shift its stance to ‘neutral’ next month. They believe the rate-setting panel of the RBI could ease its stance based on the evolving inflation outlook, global financial conditions, and the liquidity situation.
India’s MPC Maintains Unchanged Repo Rate Amidst Prior Hikes
India’s Monetary Policy Committee (MPC), having raised the key policy repo rate by 250 basis points between May 2022 and February 2023 to combat high inflation, has kept it steady. Since April 2022, the MPC has been emphasizing the “withdrawal of accommodation” as part of RBI monetary policy stance to ensure alignment with the 4% inflation target.
Economists at ICICI Securities Primary Dealership argue for a compelling case to shift the stance, citing factors such as the inflation outlook, global financial conditions, liquidity situation, and real policy rates.
“We assign a high probability that a couple of external members of the rate-setting panel may vote for such a shift in the next meeting.”
India’s December Inflation Data Reveals Divergence
In December, India’s headline retail inflation rose to 5.69% from 5.55% the previous month. However, economists note a decline in core inflation, excluding volatile food and energy prices, to 3.8%-3.9% from November’s 4.05%-4.2%.
Nomura points out that core inflation has reached a near-four-year low despite robust economic growth and recurring supply-side food shocks. Anticipating a decline to around 5% in January for headline inflation and 3.5% for core inflation, Nomura expects the MPC to cut RBI monetary Policy rates by 100 basis points between August.
Nomura Forecasts Decline in Inflation, Anticipates RBI Monetary Policy Shift
Nomura states that core inflation has hit a near-four-year low despite solid economic growth and recurring food shocks. Predicting a decline in January, Nomura expects headline inflation to fall to around 5% and core inflation to 3.5%.
Nomura anticipates the MPC to cut policy rates by 100 basis points between August and March, with a tilt towards rate cuts. Citi economists suggest a potential change in stance as early as February, stating that discussions on shifting to an RBI monetary Policy stance were raised in the December MPC meeting and highlighted by external members. They believe a sustained fall in core inflation could amplify these discussions in the upcoming February meeting.
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