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regular-article-logo Tuesday, 05 November 2024

Falling core inflation a case for rate pause

After a series of 50bps hike, the RBI raised the repo rate by 35 basis points in December

Our Special Correspondent Mumbai Published 08.02.23, 01:50 AM
RBI board members.

RBI board members. File Photo

S&P Global Ratings on Tuesday pitched for a pause in rates citing a fall in core inflation, with the repo rate itself at an elevated level of 6.25per cent.

After a series of 50bps hike, the RBI raised the repo rate by 35 basis points in December and said core inflation —which is inflation stripped off the food and fuel components— persisted at around 6 percent and posed a risk.

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“In India, core inflation has been elevated for longer; however, it eased sequentially in the second half of 2022. An already elevated 6.25 per cent policy rate limits the need for further increases,” S&P said in a report.

The RBI will announce its decision after a three-day meeting on Tuesday. Economists are divided between a 25 basis point hike in the repo rate and a pause in the rate.

The RBI has been tasked to ensure that retail inflation remains at 4 per cent with a margin of 2 per cent. However, external factors have led retail inflation to remain above the upper tolerance limit for 11months in a row. In November, the retail inflation came below the 6 per cent level and declined further in December at 5.72 per cent.

“Though overall inflation has been trending downward and within the comfort zone of India’s central bank, the RBI may continue to keep its focus on it for some more time and hence it is likely to raise the policy rate by 25 basis points on Wednesday. This, we believe, could be the last hike in the series of hikes that we have seen being cumulatively raised by 225 basis points so far, since May last year,” Krishna Kanhaiya, chief executive Mirae Asset Financial Services, said.

“Assuming that inflation continues to cool down going forward and the focus shifts to growth for the next couple of quarters, we may see a long pause in the rates ahead, before they get into a correction mode,’’ he said.

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