NEW DELHI: After October CPI shocker, most economists have raised their retail inflation estimates for the full year FY25 by 20 to 50 basis points, which they believe may prompt the RBI to consider cutting rates from the next fiscal only.
According to 10 economists, who FE spoke to, CPI inflation in FY25 may now average 4.7-5%, which is higher than the 4.5% forecast of the RBI. As a result, say some economists, the possibility of a rate cut in December as well as February has now reduced, which was being suggested by several analysts before.
Radhika Piplani, chief economist, at DAM Capital, said: “Rising global economic uncertainty may prompt the RBI to initiate a gradual rate cut cycle only next year, with a priority on managing inflation closer to 4% target on a sustained basis”. She, however, still assigns a 60% probability of a rate cut in February 2025, in the backdrop of slowdown in growth.
Garima Kapoor, economist, Elara Securities said that the likelihood of the first rate in April can not be ruled out, if viewed from purely an inflation point of view. “But, the growth momentum is ebbing, which may nudge RBI to consider the first cut in February,” she said.
Gaura Sen Gupta, chief economist, IDFC FIRST Bank said that the growth momentum in Q2FY25 has softened with decline in non-financial companies profit growth and lesser support to capex cycle from government expenditure in H1FY25. “For full year FY25, GDP estimate is expected to be 6.6% (v/s RBI’s estimate of 7.2%). Therefore, the rate cut cycle is expected to start from February onwards, provided food inflation risks subside.”
Post the October CPI and the trend of the retail prices in the first two weeks of November, full year FY25 inflation estimate is tracking at 5%, said Sen Gupta.
Data released on Tuesday showed, retail inflation rising to a 14-month high of 6.21% in October from 5.49% in September, due to a sharp rise in prices of key food items, such as vegetables–mainly tomatoes–and edible oils. Core CPI too, which excludes items of food and fuel, climbed to a 10-month high of 3.7% from 3.5% in September.
During the month, food inflation surged to a 15-month high of 10.87%, driven by a sharp jump in inflation rates of vegetables (42.18% from 35.99% in September) and oils and fats (9.51% from 2.51% in September).
Tomato inflation in October skyrocketed to 161.27% (vs 42.9% September), due to disruption in its supply caused by rainfall in key producing states, such as Karnataka and Maharashtra. But in November, prices have moderated on account of arrival of fresh supplies from Madhya Pradesh and Himachal Pradesh. In the coming months, vegetable inflation is likely to moderate on account of a favourable base effect and the onset of winter, say analysts.
However, edible oil prices are unlikely to cool down anytime soon, given India’s import dependence on the commodity. The government had hiked the basic customs duty for various kinds of crude edible oils to 20% from nil in mid-September, and for refined oils to 32.5% from 12.5% to support domestic oilseeds farmers.
ICICI Bank in a report said: “Given the revised trajectory of food inflation seen by us, we now expect Q3 headline inflation at 5.5% (5.1% earlier) and Q4 at 4.1% (4% earlier).” For FY25, the bank expects inflation to average 4.7%.
“Given the upward revision expected in Q3 inflation estimates by RBI, we believe MPC would have to wait for inflation to cool-off before it can move forward on reducing interest rates,” said the bank.
Source: The Financial Express
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