RBI unlikely to cut interest rate in 2024, food inflation to be deciding factor, says SBI chief Setty
Sep 19, 2024, 00:33 IST
The Reserve Bank is unlikely to ease the benchmark policy rate from 6.5% during 2024, given the persisting uncertainty over food inflation, State Bank of India (SBI) chairman C S Setty has recently said.
The US Federal Reserve's first cut in interest rates in more than four years happened today, triggering central banks in other economies to follow suit. The Fed trimmed the interest rates by 50 basis point trim to its target interest rate range to 4.75-5%.
"On the rate front, a lot of central banks are taking independent calls. While Fed rate cut would influence everyone, RBI would be mindful of the food inflation before taking a call on interest rate cut," Setty, who recently took over the reins of the bank, was noted as saying.
"Our view is also that the rate cut during the current calendar year may not happen. Probably, we may have to wait for Q4 (January-March 2025) unless there is a good improvement in terms of food inflation," he added.
Notably, RBIs Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das is scheduled to meet next month, between October 7-9 and take a call on interest rate. The committee will largely take retail inflation, which inched to 3.65% in August, up from 3.54% in July, into account for making rate-related decisions
On the other hand, India's wholesale price index (WPI) eased to 1.31% on an annual basis, which is also a 4-month low, down from 2.04% in July. The data, released recently by the government, also highlighted the stickiness of food price inflation, which stood largely undeterred at 3.11% in August, as compared to 3.45% in July. Although WPI rates do not directly impact RBIs decision making, it does affect the retail inflation rates, although it takes time to reflect the same.
Says Rahul Agrawal, Senior Economist at ICRA Ltd, “The WPI inflation eased to a four-month low in August 2024, with the fuel and power, core (non-food manufacturing), and crude petroleum and natural gas sub-groups together pulling down the headline WPI print by as much as 70 bps in the month vis-à-vis July 2024. The core WPI inflation dipped to 0.7% in August 2024 from 1.2% in July 2024, amidst a continued softening in global commodity prices.
"While prices of most food items have eased further on a month-on-month basis in September 2024, an adverse base would push up the YoY inflation prints for the primary food articles category significantly in the ongoing month, exerting upward pressure to the headline WPI inflation print for September 2024", said Agrawal.
The price of the Indian basket of crude oil has averaged 6.0% lower in September 2024 on a sequential basis, touching the lowest levels in 33 months, which would also help contain the uptick in the headline WPI inflation print in the month. We anticipate WPI to touch the 2.0% in September 2024 from 1.3% in August 2024", he continued.
Amongst the food articles whose prices dipped during the month were cereals (8.44%), paddy (9.12%), pulses (18.57%) and onions (65.75%), it did little to tame inflation, which continued to stay put in double digits. On the other hand, prices of potato (77.96%) and fruits (16.7%) inched up. The dip in WPI was largely led by slowdown in prices of manufactured food products (3.61%), beverages (1.9%), pharmaceuticals (1.97%) and petrol (4.23%).
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The US Federal Reserve's first cut in interest rates in more than four years happened today, triggering central banks in other economies to follow suit. The Fed trimmed the interest rates by 50 basis point trim to its target interest rate range to 4.75-5%.
"On the rate front, a lot of central banks are taking independent calls. While Fed rate cut would influence everyone, RBI would be mindful of the food inflation before taking a call on interest rate cut," Setty, who recently took over the reins of the bank, was noted as saying.
"Our view is also that the rate cut during the current calendar year may not happen. Probably, we may have to wait for Q4 (January-March 2025) unless there is a good improvement in terms of food inflation," he added.
Notably, RBIs Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das is scheduled to meet next month, between October 7-9 and take a call on interest rate. The committee will largely take retail inflation, which inched to 3.65% in August, up from 3.54% in July, into account for making rate-related decisions
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Says Rahul Agrawal, Senior Economist at ICRA Ltd, “The WPI inflation eased to a four-month low in August 2024, with the fuel and power, core (non-food manufacturing), and crude petroleum and natural gas sub-groups together pulling down the headline WPI print by as much as 70 bps in the month vis-à-vis July 2024. The core WPI inflation dipped to 0.7% in August 2024 from 1.2% in July 2024, amidst a continued softening in global commodity prices.
"While prices of most food items have eased further on a month-on-month basis in September 2024, an adverse base would push up the YoY inflation prints for the primary food articles category significantly in the ongoing month, exerting upward pressure to the headline WPI inflation print for September 2024", said Agrawal.
The price of the Indian basket of crude oil has averaged 6.0% lower in September 2024 on a sequential basis, touching the lowest levels in 33 months, which would also help contain the uptick in the headline WPI inflation print in the month. We anticipate WPI to touch the 2.0% in September 2024 from 1.3% in August 2024", he continued.
Amongst the food articles whose prices dipped during the month were cereals (8.44%), paddy (9.12%), pulses (18.57%) and onions (65.75%), it did little to tame inflation, which continued to stay put in double digits. On the other hand, prices of potato (77.96%) and fruits (16.7%) inched up. The dip in WPI was largely led by slowdown in prices of manufactured food products (3.61%), beverages (1.9%), pharmaceuticals (1.97%) and petrol (4.23%).
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"While there may not be a one-to-one correspondence between the WPI and the CPI data because of the items, size, number, and relative weights assigned, the CPI data will also down-trend in sync with the RBI’s medium-term target of 4 % for the second time in nearly five years. However high food prices will induce the RBI to be wary", notes Manoranjan Sharma, Chief Economist, Infomerics Ratings.