Will RBI cut repo rate amid skyrocketing retail inflation? Here’s how prices will look like in October

Retail prices in India shot up by 7.34 per cent in September 2020, primarily led by high food prices, which grew at 10.68 per cent in the month. Among the food items, vegetable prices soared by 20.7 per cent, meat and fish by 17.6 per cent, eggs by 15.5 per cent, pulses by 14.7 per cent, and the prices of spices rose by 11.7 per cent in September. With a double-digit growth in food inflation, the question arises whether high inflation will affect the Reserve Bank’s decision on rate cut in upcoming Monetary Policy meetings.  

Excluding vegetables, inflation was unchanged at 6.3 per cent on-year last month and core inflation also remained stable at 5.4 per cent, said Nikhil Gupta, Economist – Institutional Equities, Motilal Oswal Financial Services Ltd. While the higher headline inflation is scary, it is almost entirely led by veggies and doesn’t matter for policy at this stage, Nikhil Gupta added. 

Will RBI cut repo rate amid high inflation

It may be difficult for the Reserve Bank to cut rates before the retail inflation falls below 6 per cent. Unless the inflation falls below the higher band of 6 per cent, we don’t expect RBI to cut rates despite RBI Governor Shaktikanta Das stating to ‘look through inflation’, said Rahul Gupta, Head of Research- Currency, Emkay Global Financial Services. The central bank had expected CPI to fall in the 2-6 per cent target in the second half of FY21. While the rate cut in December is unlikely, the possibility for the same in the month of February cannot be ruled out. Amidst the unpalatable headline and food inflation figures, the relatively stable core inflation over the last three months offers some relief, keeping the hopes of a February 2021 rate cut alive, said a report by ICRA.

Inflation outlook for October

In the month of October 2020, the retail inflation could remain elevated and will be in the range of 6-7 per cent as vegetable prices continue to rise and will exert pressure, said a report by Care Ratings. The miscellaneous component could also remain elevated if gold prices increase during the festive season, the report added. While October may witness high retail inflation, the same in the second half of the fiscal year may continue to remain at elevated levels. Even though the high food inflation will eventually prove to be transient, with the favourable base effect and Kharif arrivals to soon initiate a downward trajectory, the average inflation figures for  FY2021 as well as H2 FY2021 are likely to be uncomfortably high.