The rising retail inflation has raised questions on the Reserve Bank of India (RBI)’s decision to decrease interest rates in FY24, with economists predicting no rate cut this year. However, Union Commerce Minister Piyush Goyal has a different opinion about the relationship between 14-month high food inflation data of 6.21 per cent and repo rate cut decisions.
Addressing the CNBCTV18 Global Leadership Summit 2024, Goyal said, “It is a flawed theory to consider food inflation for making a choice cutting rates. So, RBI must cut interest rates. This is my personal view, not that of government.”
Inflation has been lowest under the Narendra Modi government since India’s independence, the minister said, adding that the figures will come down by December.
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The annual inflation of 6.21 per cent in October 2024 crossed the RBI's tolerance band for the first time in 14 months. The inflation number stood at 5.49 per cent in September 2024.
The central bank, which primarily considers Consumer Price Index (CPI) to guide its bi-monthly monetary policy decisions, has been tasked by the government to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on the either side. However, the National Statistics Office data revealed that CPI breached the upper limit of the MPC’s medium-term target range of 2-6 per cent.
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What Economists Say About RBI Rate Cut?
In contrast with the commerce minister, industry players believe that the RBI is unlikely to cut interest rates this fiscal year as reducing rates could increase demand in the market, which can lead to even higher inflation rate in future. The central bank has kept the repo rate elevated at 6.5 per cent to keep inflation contained.
Dhiraj Nim, of ANZ Research attributed the increasing headline inflation to the rising prices of vegetables and fruits. “Should the RBI nevertheless hold rates unchanged, keeping costs for the economy high for a few vegetables, especially when it is becoming clearer that growth will likely undershoot their forecasts?” he asked.
He opined that rate cuts may get delayed and October CPI data has upside risks to FY25 inflation, especially when vegetable prices have not eased enough to provide much relief to consumers in November 2024.
“The RBI is expected to remain cautious, with rate cuts unlikely before February 2025. The FY25 CPI target remains at 4.6%, contingent on easing food inflation and stable geopolitical conditions,” said Arsh Mogre, Economist at Prabhudas Lilladher.
Food inflation was at 10.97 per cent in October 2024, while vegetable inflation was at 42.18 per cent, according to the official data.
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In India, food prices have always been a critical pain point for policy makers who wish to bring retail inflation to 4 per cent. But the latest data reaffirms that the inflation has not aligned with the intended target.
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