By Indranil Pan, Chief Economist at Yes Bank

“Last mile of disinflation to be challenging”, this is what the RBI governor had indicated at the February policy. And this probably continues to be the critical theme that continues into April’s policy and could be a determining factor for future policies. By keeping the rates and stance unchanged, RBI reiterated its commitment to bringing inflation to the 4 percent target on a durable basis.

As per RBI’s and our own projections, CPI inflation would come close to (even go below) the 4 percent target only in Q2FY25, taking away any chance of an early policy pivot. Patience is thus warranted. Even the global atmosphere of a rate cutting cycle is getting into an uncertain zone with most data prints from the US indicating towards a stronger economy there. And even as the last dot-plot indicates 75-bps rate cuts, the recent Fed talk has effectively been pointing to a lower extent of rate cuts in 2024.

So, what are the inflation challenges for now and for the medium term. The inflation concerns for the RBI remains hinged on the food prices outlook. In this sense, the RBI would be closely monitoring the Rabi harvesting trends (early start in Rajasthan and MP is a positive), southweat monsoon trends (El Nino is reported to be ebbing and give way to La Nina in June-August), and any vegetable shocks like in 2023.

Also read: RBI Monetary Policy: Trend of lower yields to continue

There are also indications in the Governor’s statement of an impending worry from the cost push items. The new addition to the food concern would be the oil and commodity prices, that have risen on geopolitical tensions and can also sustain in the medium term. A stable growth atmosphere will also enable companies to pass on higher input costs. Higher crude oil prices are also boosting up global edible oil prices as oilseeds are used in the production of biofuels. The government had earlier reduced the customs duty on edible oil and there may be limited scope of containing domestic price pressure on edible oil in this round. Adding to it, the Red Sea crisis has led to higher freight rates and insurance premiums, resulting in substantial imported inflation.

As mentioned earlier, CPI inflation is expected to be sub-4 percent only in Q2FY25. For FY26, RBI projects Headline CPI at 4.1 percent. Our projections also indicate that core inflation, which had been smoothly coming down and was at 3.4 percent in February 2024, would rise back to 4.1-4.2 percent by end-March 2025.

Also read: RBI has played conservative on both growth and inflation; may follow Fed for rate cuts

While decisions by the RBI would predominantly depend on domestic conditions, it is impossible to look away from the global happenings in an integrated world whereby financial market implications of a Fed move can’t be ignored. To this extent, we think that with the Indian Rupee depreciating and with interest rates between India and the US at historic lows, RBI may not be willing to move before the Fed does.

Having said, the Governor at the press conference pointed out to instances when India had moved before the Fed. But at that point, the interest differential between the US and India was much higher.

The pause phase of the RBI and the “higher for longer” have been stretched further. Given the many uncertainties on the domestic inflation scenario impact of climate changes on food supplies and its pricing, effect of geopolitics on global commodity prices, and supply chain issues will keep the central bankers on their toes.

RBI promises to be nimble footed. Honestly, as an economist, it is now becoming more difficult to predict the timing of the first rate cut in India. But it looks like this is unlikely any time soon and probably has already got pushed out into the Q2FY25.

There is no talk of real rates in this policy and probably we will get some idea of the thought around this as we read the MPC minutes later this month. The RBI has guided for an average inflation of 4.1 percent in FY26. This implies that assuming a real rate of 1.00-1.50 percent for the Indian economy the floor for the repo rate could be around 5.0-5.5 percent, implying a cumulative 100-150 bps from the current 6.50 percent. Thus, the rate cutting cycle is likely to be shallow and of the 100-150 bps cumulative cuts, only 50-75 bps will be possible in FY25.

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