Will RBI cut rates in December?

Analysts say, despite high inflation, RBI will cut rates because the liquidity crunch that began this time last year is still hurting the economy and also with an eye on the August industrial production numbers, which showed a contraction by 1.1 per cent -- the steepest in seven long years.

Illustration: Uttam Ghosh/Rediff.com

The Reserve Bank will continue to be accommodative and deliver one more rate cut in the December policy review despite the "surprising" spike in headline inflation for September, say analysts.

Some analysts also wonder if the economy is headed towards "stagflation", which is characterised by persistently high inflation and low economic and jobs growth.

Official data released on Monday showed consumer price inflation for September racing to 3.99 per cent, up from 3.3 per cent in August.

Under the inflation targeting framework, the RBI is bound to keep the price index at 4 per cent with a 2 percentage points either way.

Analysts on Tuesday attributed the sharp spike in the headline number to a rise in food prices, particularly onions which alone accounted for 0.43 percentage points of the jump.

Foreign brokerage Bank of America Merrill Lynch's economists said the sudden spurt in inflation is "temporary" and expects it move up further to 4.6 per cent in October.

But despite this, it expects the RBI to continue with its rate cuts and deliver a 0.25 percentage points reduction in the December review.

It said the RBI will take this view because the liquidity crunch that began this time last year is still hurting the economy and also with an eye on the August industrial production numbers, which showed a contraction by 1.1 per cent -- the steepest in seven long years.

If growth continues to head south or remain slow, the RBI will cut rates by a further 0.40 percent to take the repo rate down to 4.5 per cent by next September, it added.

Japanese brokerage Nomura wondered if the economy is entering a "stagflation" stage, and warned that a combination of weaker-than-expected growth and higher inflation makes for a tough policy call for the monetary policy committee.

"We believe the larger deviation of growth from target vis-a-vis inflation target will likely lead the MPC to continue with an accommodative policy stance and deliver another rate cut of 0.15 per cent in December," it said.

Singaporean bank DBS also expects the rate-setting panel is likely to look past food inflation and not put brakes on the easy money policy.

It can be noted that the RBI has cut rates by a cumulative 1.35 per cent in five consecutive rate cuts in 2019, to prop up growth amid the legroom created by softer inflation and falling growth numbers.