Last month, the Reserve Bank of India defied financial market forecasts and kept interest rates on hold at its monetary policy meeting. It announced it was taking a “wait-and-watch” approach to inflation. Now, it seems the central bank was right to hit the pause button.
India’s consumer price inflation hit an 18-month low of 4.7 per cent in April, helped by a slowdown in food price increases. The data released late on Maty 12 also marked the second month in a row that inflation remained below the central bank’s ceiling of 6 per cent.
Do the inflation numbers released mean that after six interest rate hikes the Reserve Bank’s aggressive tightening cyle is over?
Economists say that’s too early to say with the global economic outlook remaining uncertain and worry that weather-roiling El Nino may play spoiler to the monsoon. Droughts have occurred in India in five of six El Nino years since 2000, according to Skymet Weather Services. Also, India’s inflation has appeared to moderate in recent months only to resurge.
But analysts believe that the Reserve Bank is sure to hit the pause button again on rate hikes at its next policy-setting meeting in June. They also say rates could remain on hold until at least the end of the year.
“With inflation risks easing, we expect the Monetary Policy Committee to remain on a 'pause' at least till the end of 2023," said Garima Kapoor, an economist at Elara Capital.
RBI governor Shaktikanta Das, though, called the latest inflation numbers “very satisfactory.” He added the data has given him a “good amount of confidence, that the monetary policy is on the right track.” The Reserve Bank has raised its key lending rate by a total of 250 basis points since inflation hit a peak of 7.79 per cent in April 2022.
Some economists believe that the rate hiking cycle may over. “It appears the pause is for good,” said Madhavi Arora, lead economist at Emkay Global.
With the interest rates hikes dampening demand and weighing on economic growth, cooling inflation is good news for Prime Minister Narendra Modi’s government heading into an election year.
Factory data released separately on the same day underscored the stress on the economy with industrial production accelerating by just 1.1 per cent in March, its slowest pace in five months. The industrial output number badly undershot analysts’ expectations of just over 3 per cent growth.
Food inflation, which accounts for nearly half of the overall consumer price basket, fell again in April, as price rises of cereals and edible oils softened. Lower global commodity prices have helped ease price rises.
But a bad monsoon could stoke inflation again in India. “Food segments will be vulnerable to weather-related risks,” said one economist. Both Skymet and the Indian Meteorological Department (IMD) already expect the monsoon to deliver a relatively modest amount of rainfall and the arrival of El Nino could turn a not-so-great rainy season into a bad one.
Another factor buttressing hopes that the Indian interest-rate hiking cycle may be over is that US Federal Reserve has hinted that its quarter-percentage-point interest rate rise earlier this month may the final one in its current anti-inflation battle.
“Tentative calm in the global markets, helped by a US rate cycle likely slipping into an extended pause, lowers the likelihood that the RBI policy committee will return to hikes in this cycle,” said Radhika Rao, senior economist at DBS Bank.
