RBI monetary policy: October or December - when is the ripe time?

The reason why the RBI till the August policy had its feet on the brakes is its assessment of inflation risks

The advanced economy (AE) world has now moved into an easing momentum. The latest to join the bandwagon is the US Federal Reserve with a 50 basis point (bps) cut. Fed’s Jerome Powell, while not decisively ruling out another 50-bp cut at the November meeting, has, to an extent, downplayed the possibility of the same. At the time of writing, the CME Group’s Fed watch tool now considers a 66 per cent chance of a 25-bp cut. But as recent evidence will have it, one cannot be sure, and another dose of lower-than-expected labour market reading could again swing it. The European Central Bank (ECB) had been moving gradually and cautiously on rate cuts in their own early stages of the monetary easing cycle. Now, with further evidence of subsiding inflation pressures, ECB President Christine Lagarde has also hinted at an October cut.

The reason why the Reserve Bank of India (RBI) till the August policy had its feet on the brakes is its assessment of inflation risks. The signal is clear — the RBI will not rest till the headline consumer price index (CPI) inflation is aligned to 4 per cent on a durable basis. There have been some positives in the trend of food inflation whereby it was reported at 5.7 per cent in August 2024 compared to 8.7 per cent in April 2024. The southwest monsoons have started to withdraw with cumulative rainfall at 7.6 per cent higher than long period average. The distribution of the rainfall has also been good with 53 per cent of the country receiving normal rain while 32 per cent received excess and large excess rains. Deficiency in rains was seen in only 15 per cent of the country. Importantly, states that have received normal rains account for 54 per cent share in overall food grain production. With good rains, reservoir levels are up at 87 per cent of live storage capacity and are also higher than the last 10-year average storage levels. Overall, while kharif sowing was better than last year, the reservoir levels also bode well for the rabi harvest. Thus, food prices are likely to remain well contained and will continue to contract and soon we will be stepping in the winter months, which generally bode well for items, such as vegetable prices. The vegetable shock during the summer months was also much more contained than in the previous summer.

On one hand, as the food inflation continues to correct, the core inflation has remained contained. We expect to see the core move higher from here, on the back of an adverse base from last year. A paper by the RBI had indicated that food price shocks have been imposing upside pressures on core inflation and this has been offset by a tight monetary policy. With risks to food prices easing, could there be a chance for the RBI to look towards softening the monetary policy a bit. However, I think that the RBI may be factoring in the upside risks to the oil prices that have been presented by the Israel-Iran crisis. Global commodity prices have also moved to the higher side, especially in September. Further, one would need to crucially watch out for the US elections and the new government’s stand on tariff walls being raised. This could impact the global supply chain and cross-border prices of critical commodities.

The growth assessment by the RBI could be lowered a tad from the previous policy. From a 7.2 per cent and armed with a 6.7 per cent reading for the first quarter (while RBI had estimated 7.1 per cent), could lead the growth outlook to be lowered to 7 per cent in the October policy. Some of the lead data in India from the growth side has also started to weaken and needs to be factoring in by the RBI. PMI manufacturing has moved lower, personal credit growth is moving down, passenger vehicle sales are weaker. Juxtaposed against this is the agri-led revival that is expected in rural consumption. Only time will tell how much rural growth can supplement the till-now strong urban demand. Private capex recovery has underwhelmed and will be watched amid spillovers of geopolitical tension and geo-fragmentation.

So, where does this leave us? A new Monetary Policy Column committee takes over and it would be crucial to watch out for the thoughts of the new external members. That said, while a rate cut is not a possibility for October, the crucial question is — will the RBI prepare the market for an eventual one in December?

Till now, the RBI has exhibited maturity in not providing any forward guidance on rates, given considerable uncertainties emanating from climate risks, global supply chains etc. My bet is the stance will thus also stay unaltered. Importantly, I think there is no need for the RBI to prepare the market and then cut rates – the change in stance and the reduction in the rate can happen at the same policy. While the start date of a rate cut is debated, there appears little debate on the fact that the depth of the rate cut this time will remain shallow – only to the extent of 50-75 bps.

The writers is chief economist at YES Bank