Can October CPI inflation numbers alter RBI’s monetary policy path?

October CPI inflation: The spectre of inflation continues haunting investors as economists and experts expect India's Consumer Price Index (CPI)-based inflation, also known as retail inflation, to inch closer to the RBI's upper tolerance band of 6 per cent.

According to a Reuters poll of economists, a spike in vegetable and edible oil prices may have shot up India's CPI inflation for October to a 14-month high of 5.81 per cent. On the other hand, economists polled by Mint said retail inflation could come at 5.95 per cent in October.

Elevated food inflation remains a key concern. Retail inflation rose to a nine-month high of 5.49 per cent in September, the highest rate since December 2023, when it was 5.69 per cent.

Heavy rains this year significantly affected crop production, leading to rising food prices. Some experts believe weather-related shocks will subside, and retail inflation will come down to the RBI's 4 per cent target in FY26.

"The gap between volatile inflation components like vegetables and underlying core inflation is widening sharply, as heavy rains cause a temporary price spike. We do not expect these weather-led price shocks to last, as they typically reverse in a few months.

However, near-term inflation will likely be higher, but longer-term inflation will eventually moderate," said BofA Securities.

The brokerage firm estimates headline inflation to be above 5 per cent in Q4 2024 before reverting to the 4 per cent range for an extended period in 2025.

BofA Securities continues to expect a 25bp rate cut at the December MPC meeting but acknowledges the risks of a delay.

"We remain comfortable with our view of 100bp of cuts, bringing the repo rate to 5.50 per cent by end-2025, which we would classify as being close to the neutral policy rate in India," the brokerage firm said.

Can October CPI inflation numbers alter RBI's monetary policy path?

While the US Fed has started reducing rates, the RBI has paused. In its last policy meeting, however, the central bank changed its policy stance to "neutral" from "withdrawal of accommodation."

RBI Governor Shaktikanta Das reiterated the risks of inflation, making some experts believe the change in stance may not necessarily mean a rate cut in December as there was no downward revision in growth and inflation estimates.

We consulted several experts for insights on October inflation and its potential impact on the RBI’s monetary policy. Here's what they say:

Rajani Sinha, Chief Economist, CareEdge Ratings

Sinha projects CPI inflation to be 5.83 per cent in October. Over the last month, food prices experienced a broad-based increase, primarily driven by higher costs for vegetables and edible oils.

The surge in vegetable prices, particularly tomatoes (39 per cent month-on-month) and onions (6.2 per cent month-on-month) can be attributed to unseasonal rains and extended monsoons in certain parts of the country.

Higher global edible oil prices and the recent hike in the basic customs duty of various edible oil prices will keep inflation in edible oil higher, given their import dependence.

In mid-September, the government hiked the basic customs duty of various edible oils to support domestic oilseed prices.

"Despite a favourable base effect, we expect October CPI inflation to inch closer to the upper end of the RBI’s MPC target range," said Sinha.

The increase in CPI inflation, driven by elevated food prices, may delay the RBI's anticipated rate cuts.

With headline inflation expected to approach the upper end of the RBI’s tolerance band, the central bank will likely maintain the current policy rates and stance in its December meeting.

The Governor has also recently cautioned against making premature interest rate cuts, citing the ongoing risks of elevated inflation.

Madhavi Arora, Lead Economist at Emkay Global Financial Services

Arora expects CPI inflation to accelerate further in October to 5.9 per cent, with an upside bias.

The uptick will likely be led by rising perishable vegetable prices, edible oils, and wheat, while a rise in gold prices will also be reflected in the personal care category in CPI.

The spillover of impending bond and forex volatility via the global financial markets would mean the aim of financial stability may precede inflation management, which may merit a wait-and-watch approach for some emerging market central banks, including the RBI.

This makes the December rate-cut call tricky and may lead to a shallower rate-cut cycle following the Fed.

Saurabh Patwa, Head of Research and Portfolio Manager, Quest Investment Advisors

The RBI will likely be cautious about rate cuts for the December review as domestic economic fundamentals take precedence.

With CPI at 5.5 per cent in September and inflation projected to remain elevated, primarily driven by food prices and adverse base effects, the central bank has limited leeway for immediate policy easing.

The recent depreciation of the rupee against the dollar after the US elections adds an external headwind, further constraining rate flexibility in the near term.

However, stabilising global financial conditions and a softening in urban demand dynamics could open the door for a measured rate cut in 2025, contingent on favourable domestic food crop yields.

Teresa John, CFA, Deputy Head of Research & Economist, Nirmal Bang Equities Private Limited

CPI inflation is expected to rise to 6.2 per cent in October from 5.5 per cent in September on account of a sharp rise in vegetable prices (led by tomatoes) and a continued rise in prices of edible oils.

Core inflation is expected to remain benign at nearly 3.65 per cent in October, although it will inch up from 3.5 per cent in September on account of higher gold prices and some uptick in housing prices.

The RBI is likely to remain on hold at its December meeting given the jump in CPI inflation led by food prices unless growth significantly surprises on the downside in Q2FY25 (below 6.5 per cent).

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.