RBI may defer rate cut call to February as inflation’s still hot

India’s central bank is likely to defer a decision on slashing rates to at least February, economists said, illustrating the risks posed by imported inflation from a sliding currency and higher US yields after the election of stiff tariffs-backing Donald Trump as the incoming president.

Reserve Bank of India (RBI) Governor Shaktikanta Das has said the October inflation print could exceed September’s 5.5%, and odds have lengthened on a durable win against inflationary pressures after the Trump victory raised the likelihood of both higher US borrowing and consumer prices – a combination that limits headroom to lower rates more quickly in the world’s biggest economy.

“October inflation CPI numbers are again going to be very high, perhaps higher than the September numbers,” Das said at an event on November 6. The RBI governor emphasised that he had highlighted “significant upside risks to inflation”. The RBI has projected CPI at 4.5% for FY25.

IDFC First Bank, who initially predicted a December cut, has now pencilled in February as the earliest date when India might begin easing rates. State Bank of India, the nation’s largest bank, too, expects a February rate cut, the bank’s chairman CS Setty said in its post-result conference.

“We push out our first RBI rate cut call from December 2024 to February 2025 as the RBI waits for the likely October inflation spike to drop, and global financial markets to stabilise” said Parnjul Bhandari, chief India economist at HSBC.The market factored in the easing of the policy rate after the CPI inflation print came within the target for two consecutive months in July and August, while the September print was within the band of 2% to 6%.In addition to the public communication by top officials, the central bank released four research papers with a granular assessment of the dynamics of various components of food inflation. This indicates the depth and seriousness of the central bank’s priority on food inflation, though popular belief is that food inflation is essentially a supply-side concern where the central bank has a limited role at the policy level.The concerns over food inflation are due to a sharp rise in edible oil prices and the persistence of high vegetable price inflation. In the past, the RBI used to often look through vegetable price inflation, but that is not the case anymore. “Back-to-back shocks seem to have made officials distrustful of quick disinflation in vegetable prices,” said Bhandari.

Despite easing liquidity and telegraphing of India being past its policy rate peak, treasury yields continue to hover close to policy repo rates (6.5%) across maturities, and the yield curve is nearly flat for both G-Sec and AAA-rated bond markets.

“This is a bit perplexing and seems to suggest that the market is not building in sustainably lower rates or a meaningful cutting cycle,” said Shantanu Chakrabarti, analyst at BNP Paribas Securities.

However, Barclays and Nomura are expecting a December rate cut. The growth glass for India looks ‘half empty,’ according to three Nomura proprietary indices. “Our base case calls for a first cut in December, although this is a close call (55% probability),” Nomura said in a note on November 8.