Retail inflation jumps, rate cut expectations shift; should investors adjust investment strategy? Experts weigh in

India's retail inflation for September came in higher than expected, sparking concerns that the Reserve Bank of India (RBI) might delay interest rate cuts even further, potentially dampening investor risk appetite.

Higher food prices drove Consumer Price Index (CPI)-based inflation, or retail inflation, to a nine-month high of 5.49 per cent, still within the RBI's medium-term target of 2-6 per cent.

This is a blow to market expectations of a rate cut in December as the RBI, in its October monetary policy review, projected inflation to ease gradually, averaging 4.5 per cent for the financial year 2025.

Some economists now foresee a rate cut delayed to the first half of 2025. However, some hope RBI will bite the bullet and cut rates in December.

Given the uncertainty surrounding inflation and the trajectory of interest rate cuts, the higher-than-expected September CPI data has sparked a debate on whether investors should adjust their strategies.

Mint reached out to several experts for their insights on which sectors investors should focus on during periods of high inflation. Here's what they had to say:

Madhavi Arora, Chief Economist, Emkay Global Financial Services

With this inflation surprise, the Q2FY25 inflation has slightly overshot RBI's forecast.

We are tracking the next month at around 5.25 per cent and now see the overall FY25 headline inflation overshoot RBI's forecast by 15-20 bps.

This could pressure the RBI further, which is already weighing various global and domestic push-and-pull factors before jumping the rate cut gun.

Weaker activity data and existing slack will continue exerting disinflationary pressure on core prices (ex-gold), even as food inflation stays somewhat untamed.

Meanwhile, despite the commencement of the Fed’s cut cycle with a bumper 50 bps cut, the recent upside surprises on US growth, labour market, and inflation may still reignite the underappreciated risk of a ‘higher for longer’ scenario.

The event risk of the Nov-24 US elections could materially disturb Asian forex dynamics amid the ratcheting up of the US-China trade war.

All this could add to global volatility, and the uncertainty may weigh on some emerging market Asian central banks' reaction function, including RBI.

This means that the aim of financial stability may precede inflation management.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers

A larger-than-expected rate cut by the US Federal Reserve, coupled with recent weaker macroeconomic data—such as industrial production, exports, and the PMI—has raised the likelihood of a rate cut by the RBI’s Monetary Policy Committee (MPC) in its December 2024 meeting.

However, the latest retail inflation figure is notably higher than the RBI’s forecast and consensus expectations.

Therefore, unless inflation significantly declines in the next release, the RBI is unlikely to opt for a rate cut in December.

We believe the most probable scenario is a rate cut beginning in the first quarter of 2025.

While holding off on a rate cut in December might cause a temporary and marginal dip in equity market sentiment, a rate cut during the meeting would likely positively impact market sentiment.

Manish Chowdhury, Head of Research, StoxBox

We do not see the recent uptick in consumer price inflation as a cause of concern as the base effect and a rise in food prices, including vegetables and edible oil, primarily drove it.

With the onset of winter in the weeks ahead, we expect food prices to ease and inflation to fall back to the RBI’s comfort zone.

We do not expect the recent inflation print to materially impact the overall consumption theme. In the current context, we remain constructive on banking and IT sector stocks.

From the large-cap space, we particularly like HDFC Bank and Infosys from a 12-month perspective and do not expect the recent strength in inflation to hurt their business operations.

Vaibhav Porwal, Co-Founder, Dezerv

Considering the above-average long-term rainfall, we anticipate that food inflation will begin to moderate.

We still expect the Reserve Bank of India (RBI) to initiate a rate-cut cycle in December or at the start of the first quarter of CY2025. Additionally, given the current market valuations, we maintain our portfolio strategy with increased allocations to large-cap stocks.

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services

CPI inflation in September, coming at 5.49 per cent, though slightly above expectations, cannot be regarded as excessive since it is mainly due to the base effect.

The only consequence is that the MPC might postpone the rate cut to 2025.

There is no valuation comfort in the market now. So, investors should prioritise safety over high returns.

Financials have valuation comfort, and IT is doing reasonably well with realistic valuations. Defensives like Pharma and FMCG can be considered for investment on dips.

Nishant Srivastava, CEO, Torus Wealth

The hotter-than-expected September inflation underscores the ongoing inflationary pressures in India.

While we are recommending investors adjust their strategies accordingly, it's important to maintain a long-term perspective.

Sectors like consumer staples, healthcare, and utilities, typically less sensitive to inflation, can offer some protection.

Mohit Khanna, Fund Manager, Purnartha

With the backdrop of solid monsoon, food inflation should also cool off eventually.

The RBI Governor seems aware of this phenomenon and not only changed its monetary policy stance to ‘neutral’ but also pointed out that inflation-targeting might now be impacting the GDP growth seen with muted GST collections, auto sales, and industrial production.

I do not think there is any need to panic and make any changes to the portfolio just because a month’s number is unfavourable.

It is just a month’s number and still not a trend. With the RBI changing its stance favourably, Brent trading lower (after OPEC’s low demand growth commentary and even after the ongoing Middle-East conflict), strong monsoon season, under-control core inflation, and sliding GDP growth, we are still going to have a rate cut in CY24.

And therefore, there is no need to panic and make changes to the portfolios and overall asset allocation. However, we expect heightened market volatility (given high valuations), which calls for close monitoring of the portfolios.

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.