Retail inflation in India eased to 5.66 per cent in March as consumer food price index (CFPI) moderated to 4.79 per cent from 5.95 per cent in February 2023. The retail inflation rate slowed from 6.44 per cent in February and was back in the mandated 2%-6% comfort band for the first time in this calendar year.
Later yesterday night, data showed US inflation rate eased to 5% in March, logging its lowest rise in almost two years.
Minutes of the Federal Reserve’s March meeting, that came yesterday, showed that inflation remained a priority for the monetary authority and some additional policy tightening may be appropriate. However, a number of Fed members had considered holding rates in the March meeting, awaiting clarity if the failure of two regional banks was contained and not turning into a systemic risk.
The MPC had left rates unchanged at 6.50% after six consecutive hikes, but the panel indicated the six-member panel may consider more rate hikes if necessary. A cumulative 250 basis points benchmark rate hiked has also sharply raised the loan rates both for corporates and consumers.
In February, the MPC had issued a very hawkish guidance, and the voices of doves had gone unheard. External members Jayanth Varma and Ashima Goyal had voted against the decision to raise the key repo rate. It seems the MPC this time had heard the doves. Nonetheless, the RBI governor had emphasised the decision to pause was for the April meeting only. Several economists had recently estimated that the Reserve Bank of India-led MPC will hold rates unchanged at least until the end of this fiscal, evaluating the delayed impact of previous rate increases on economic output and price pressure. Ahead of the release of the retail inflation print, a Reuters poll of economists showed 51 economists expect MPC to remain on hold for the remainder of the year, despite inflation hovering near the top end of the 2-6% tolerance range and no prospect of hitting the mid-point soon.
RBI Governor Shaktikanta Das had earlier said how they would keep ‘Arjuna’s’ eye on inflation, and perhaps continued cooling off of inflation from hereon may keep the committee maintain a status quo.
“Today’s inflation print aligns with RBI’s recent policy pause at 6.5%. We expect the RBI to stay on hold for the remaining part of FY24 and the bar is set high in terms of triggers for the RBI to consider future rate hikes,” HDFC Bank said in a research note.
The bank expects inflation to average at 5% in Q1 FY24 as the base effect lingers on. Also, the federal weather office’s recent prediction of a normal monsoon season provides some comfort that the inflation trajectory could fall in line with the RBI’s forecast.
“However, we think it is still early days and the spatial and temporal distribution of monsoon will be critical along with any signs that El Nino conditions are impacting the monsoon progress. Moreover, we suspect that oil prices are likely to average higher than the RBI’s forecast (at $85 pbl) and could put some upward pressure on inflation. On average, we expect inflation at 5.3% for FY24,” HDFC Bank said.
The RBI had last week cut the inflation forecast for this fiscal year to 5.2% from 5.3%, even amid sticky core price pressure, adverse climate conditions and risks to global commodity prices.
“With CPI inflation expected to moderate in the coming months and an improvement in the household’s inflationary expectation, we can expect a status-quo on RBI’s policy rate hike in FY24. With average CPI inflation expected around 5% in FY24 (higher than RBI’s target of 4%) and GDP growth around 6%, we do not expect RBI to start cutting the rates in FY24,” Rajani Sinha, Chief Economist at CareEdge said.
CareEdge expects some pick-up in inflation in the second half of the fiscal year but it will likely stay within the RBI’s target range. The core inflation will also ease gradually as the impact of past rate hikes play out.
Radhika Rao, senior economist and executive director at DBS Bank, Singapore expects the headline print to likely average sub-5% this quarter on base effects, convincing the MPC to leave rates unchanged at the next review. Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, also said that the RBI is expected to remain on an extended pause evaluating the impact of the past rate hikes.
With headline inflation reverting to the target band, the MPC will draw comfort, Yuvika Singhal, economist at QuantEco Research said, adding there will likely be additional support from the preliminary weather forecast by the IMD. However, there is the possibility of El Nino disrupting the south-west monsoon season.
“While initial signs of moderation in core inflation are encouraging, we do note that the grind lower could be slow as there are price pressures (utilities, milk, eggs, meat, contact intensive services, etc.) still awaiting passthrough,” Singhal said.
“If there are no surprises on the weather and the oil front, one can expect the headline inflation to moderate further and settle in the band of 5.0%-5.5% over the next few months. Such a trend is likely to support the continuation of the pause although a pivot on rates is still some distance away,” said Suman Chowdhury, chief analytical officer at Acuite Ratings & Research.