Should RBI slash lending rates while battling inflation?

Economists are reassessing their predictions regarding interest rate reductions in India following an unexpected acceleration in inflation last month, primarily driven by rising food prices. Several analysts, including Upasna Bhardwaj from Kotak Mahindra Bank Ltd and Gaura Sen Gupta from IDFC First Bank Ltd, suggest that the Reserve Bank of India (RBI) is unlikely to implement interest rate cuts in December as previously anticipated, particularly after data released on Monday indicated that consumer prices increased at the highest rate this year in September.

It's a burden of expectations

Financial institutions such as Goldman Sachs Group and Deutsche Bank AG maintain their expectation for the RBI to ease rates in December; however, they acknowledge that the likelihood of this occurring has diminished, potentially delaying it until next year.

“The near-term inflation profile will remain close to 5%, which will likely keep most rate-setters members cautious,” said Kotak’s Bhardwaj, who now expects a reduction in the first half of next year.

Last week, the RBI adjusted its policy stance to neutral, signaling a possible shift in direction.

Governor Shaktikanta Das has held the benchmark rate steady for over 20 months and has consistently emphasized the importance of reducing inflation to a sustainable 4% target before considering any easing measures.

Inflation

Inflation in September exceeded the 5.1% median forecast from a Bloomberg News survey of economists, following an August figure of 3.65%. Month-on-month, prices increased by 0.6% in September after remaining unchanged in August.

The inflation surge was primarily attributed to food prices, which constitute nearly half of the consumer price index, rising by 9.24% in September compared to the previous year. Vegetable prices experienced a significant increase of 36%. When excluding the more volatile food and fuel categories, the core inflation measure slightly rose to 3.56% from 3.44%.

Goldman Sachs economists Santanu Sengupta and Arjun Varma noted that the unexpected rise in vegetable inflation "poses some risk to our call of the start of the RBI monetary policy easing cycle in December." Nevertheless, they anticipate that some of the increase in vegetable prices may reverse in October, with a potential "sharp sequential contraction" expected in November and December due to the arrival of fresh harvests.