The Reserve Bank of India’s inflation projection has belied hopes for a reduction in the interest rates in the current financial year (2023-24) as retail inflation is expected to remain elevated due to high vegetable and foodgrain prices, economists and analysts said.
Inflation which is expected to remain above the five per cent till the first quarter of 2024-25 is likely to hit the 6.2 per cent level in the ongoing quarter (July-September), according to the RBI projection. The benchmark Sensex fell by 308 points to 65,688.18 amid worries about a delay in the rate cut and 10 per cent increment cash reserve ratio for banks.
On Thursday, the RBI, while retaining the repo rate at 6.50 per cent, revised its FY24 inflation projection to 5.4 per cent from 5.1 per cent announced in June. It said CPI inflation is expected to touch 6.2 per cent in the second quarter, 5.7 per cent in the third quarter and 5.2 per cent in the fourth quarter of FY 2023-24. “This means the high policy rates will remain high for long and, therefore, a rate cut can be expected only in Q1 FY25,” said VK Vijayakumar,” said Chief Investment Strategist at Geojit Financial Services.
HDFC Bank Chief Economist Abhhek Barua said the RBI’s message was clearly hawkish. “We expect inflation to average at 5.6 per cent in FY24 with inflation expected to print above 6 per cent till September,” Barua said.
According to Madan Sabnavis, Chief Economist, Bank of Baroda, while the RBI has expectedly not changed the repo rate or stance this time, there has been a change in inflation outlook, quite significantly.
“With the steep upward revision in the inflation projections, the expectation of a rate cut is pushed further to the next fiscal,” said Rajani Sinha, Chief Economist, CareEdge. Additionally, the announcement of a temporary provision of incremental CRR will help remove the build-up of excess liquidity in the system.
The policy sounded more cautious than the last two meetings, with a significant upward revision in the inflation numbers for the upcoming quarters. Given the transient nature of the seasonal shocks, the RBI will wait for more data points to evaluate the emerging inflation dynamics and will likely look through any temporary rise in inflationary pressures in the near term, Sinha said.
Dharmakirti Joshi, Chief Economist, CRISIL, said the spike in vegetable inflation is a recurrent, and often transient, phenomenon and the central bank can afford to look through it. “High foodgrain inflation, amid threat from weather and global developments, is difficult to ignore, given higher weight in CPI basket. Although repo rate hikes cannot directly impact supply-side driven food inflation, it becomes a concern if it sustains and spills over to other components, and steers headline inflation away from goal,” Joshi said.
“We have to stand in readiness to go beyond keeping Arjuna’s eye to deploying policy instruments, if necessary. I we need to remain firmly focused on aligning inflation to the target of 4.0 per cent,” RBI Governor Shaktikanta Das said.