Rate rise fear ebbs as inflation seen softening

As on Monday, the prices of many vegetables had fallen as much as 50% compared with those a month before, due to increased supply, following the arrival of winter crops in the markets

The fear of an off-policy rate rise has ebbed substantially following a cooling of vegetable prices, which is likely to moderate headline inflation. Both wholesale and retail inflation figures, to be released next week, are likely to show a softening bias.

This will allow the Reserve Bank of India (RBI) to maintain status quo in the third quarter review of monetary policy scheduled on January 28, feel market participants.

“The direction of this review will depend upon the coming inflation numbers. There is a general sense in the market that food and vegetable prices have softened. If there is a significant decline in food inflation, that would enable the overall level of inflation to come down. If there is a substantial decline in inflation, the RBI governor will have the headroom to hold rates at the current levels. I expect the inflation numbers to soften and in the January monetary policy, review rates will be on hold,” said S Prabhu, vice-president (fixed income), IDBI Federal Life Insurance.

“In normal circumstances, they (RBI) will not come up with off-policy reactions. We have not seen any extraordinary situation to warrant a shift in the policy stance,” he added.

The latest data suggests that as on Monday, the prices of many vegetables had fallen as much as 50 per cent compared with those a month ago. This was due to increased supply, following the arrival of winter crops in the markets.

The yield on the 10-year benchmark government bond is much more stable than in the recent past. The yield on the 8.83 per cent 2023 government bond ended at 8.79 per cent on Thursday, compared with the previous close of 8.80 per cent. About a fortnight earlier, on December 27, the yield was 8.96 per cent.

The Consumer Price Index (CPI) inflation number rose to 11.24 per cent in November, compared with 10.17 percent the previous month. The Wholesale Price Index (WPI) inflation data for November rose to 7.52 per cent, compared with October’s seven per cent.

“We are expecting a pause from RBI, as we expect inflation to come off very sharply. We expect the December CPI-based inflation at 10 per cent and WPI-based inflation data at 6.95 per cent,” said Anubhuti Sahay, senior economist, Standard Chartered Bank.