India’s Inflation Below Target: A Temporary Relief?

India’s retail inflation, measured by the Consumer Price Index (CPI), dropped to a near five-year low of 3.54% in July 2024, down from 5.08% in June, driven by lower food prices and a favorable base effect. Despite this, the likelihood of an early repo rate cut by the Reserve Bank of India (RBI) remains slim. The CPI has been below the RBI’s tolerance band of 2-6% for 11 consecutive months and even dipped below the central bank’s 4% target in July.

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RBI’s Cautious Approach: No Immediate Rate Cuts

The RBI’s Monetary Policy Committee (MPC) continues to prioritize a disinflationary stance, emphasizing the need to ensure the headline CPI inflation aligns with its target sustainably. Despite the low inflation, the RBI revised its inflation forecast for the July-September 2024 quarter to 4.4% from 3.8%, indicating a cautious approach. Economists expect core inflation to rise slightly as the base effect fades, further reducing the likelihood of a rate cut.

Core Inflation Concerns and External Factors

Economists like Madhavi Arora from Emkay Global Financial Services expect core inflation to average 3.6% in FY25, with no significant rise until the end of CY24. The RBI is likely to maintain its current stance, focusing on domestic inflation and risks, even as global factors, including potential US Federal Reserve rate cuts, could influence its decisions.

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Market Expectations: Deferred Rate Cut Hopes

Analysts, including those from Prabhudas Lilladher, anticipate CPI inflation stabilizing between 4.5% and 5.0% after August 2024. Factors such as telecom tariff hikes and monsoon distribution anomalies could impact near-term inflation dynamics, suggesting that the RBI may not begin its rate easing cycle before Q3 FY25. In contrast, Antique Stock Broking projects a potential rate cut between October and December 2024, contingent on easing food inflation.

Conclusion: Patience Required for Rate Cuts

While July’s CPI inflation drop offers some relief, it is insufficient to prompt an immediate rate cut. The RBI’s cautious stance, along with expectations of rising core inflation and external economic influences, suggests that rate cuts may be deferred until FY25. The central bank remains focused on a sustainable alignment of inflation with its target, indicating that patience will be required before any rate easing occurs.

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