Premature To Read Much Into The February Rate Cut Expectation

Led by lower food inflation, the CPI inflation expectedly eased to 5.5 per cent in November from 6.2 per cent in October, falling back within the medium-term target range and offering a dose of relief. To be precise, headline inflation for November moderated to 5.48 per cent, especially for vegetables, fruits, meat and pulses. Core inflation also ticked down to 3.8 per cent, mainly due to lower gold prices, with sequential easing continuing to depict weaker domestic demand. The policy trade-offs are getting acute with a tricky and small window of conventional rate cuts as global dynamics turn more fluid.

Besides, mounting foreign exchange pressures and increasing cost of foreign exchange intervention will need to be weighed before contemplating to deeply cut rates. As for now, though, analysts do not rule out a cut in February, but they would be more comfortable taking a firm call closer to the policy window, as a new Governor for the Reserve Bank of India (RBI) and MPC are in place.

Within food, the recent sharp spike in vegetables reversed somewhat as supply improved, driving most of the decline in food and headline inflation. Prices for fruits, meat and fish and pulses also declined sequentially. However, oils and fats continued to move up sharply following the hike in import duties on edible oils as well as higher global prices. Egg prices were also significantly higher due to higher demand as well as rising poultry feed costs. Core inflation also moderated, albeit a tad, marking the second-highest in the last 12 months. However, monthly momentum at 0.2 per cent was the lowest since June, reflecting the continued weakness in domestic demand. The downtick was led by personal care and effects, mainly due to lower gold prices during the month. All other categories remained below 0.4 per cent. Core inflation has likely bottomed out, but might hover around 3.7-3.8 per cent in the coming months.

Experts are currently tracking December headline inflation to soften to 5.3-5.4 per cent, with fruit, vegetable, and meat and fish prices easing further. Additionally, while edible oil prices have stayed higher so far in December, global prices have dropped, which should percolate to domestic prices. While the MPC has been wary of higher food spillover risks to core inflation, Emkay still sees core inflation averaging 3.5 per cent in FY25E and staying below four per cent in the coming months.

Though the headline CPI trajectory is in line with the RBI’s forecast, easing headline CPI does not guarantee a deep, linear rate-cut cycle. The policy trade-offs are getting acute with a tricky and small window of conventional rate cuts as global dynamics turn more fluid. Besides, mounting foreign exchange pressures and increasing cost of foreign exchange intervention will need to be weighed before deeply cutting rates. Icra remains optimistic about rabi crop, considering the favourable impact of high reservoir storage and the ensuing La Nina conditions on sowing and crop yields.