Some newspapers exclaimed that the Reserve Bank of India would soon, as early as next financial year that starts in April, consider cuts in interest rates because inflation fell to below 5⁒ last month.

But are interest rate cuts on the table?

Inflation fell below 5⁒ but is likely to rise again, and until inflation stabilises at or around 4⁒ for a sustainable period, the RBI's monetary policy committee is unlikely to vote for rate cuts.

US Federal Reserve Chair Jerome Powell had warned of "head fakes" in the context of US inflation, where the prices fall for a few months and rise again soon after.

The same may be true in the case of India as well.

Head Fake

India's headline CPI inflation moderated to 4.87⁒ in October from 5.02⁒, or to its lowest level since June, thanks to a favourable base effect. This is in sharp contrast to the previous quarter, when inflation had sped due to volatile food prices, to clock an average of 6.43⁒.

The fall in CPI inflation in October was also due to a fall in core inflation.

Core inflation, which strips out volatile items such as food and fuel, eased to a 43-month low of 4.2⁒ in October from 4.5⁒ in September, according to an Informist Media report.

The October reading could be as good as it can get. Inflation could rise again as the base effect fades. Some estimates say it will again rise to the upper bound of the MPC's 2-6⁒ target range in the coming two months.

Food inflation continues to be a cause for worry.

Both the overall index and the food price index rose on a sequential basis in October, after declining for two straight months. Within food, the vegetable price index rose 3.4⁒ month-on-month in October because of a 15.5⁒ sequential jump in onion prices.

Even tomato prices are on the rise after the sharp correction seen in the last two months. Tomatoes and onions could drive up inflation closer to 5.5⁒ for November.

Apart from tomatoes and onions, protein inflation too was higher in October. The index of pulses and products was up 2.5⁒ on month in October. Pulses inflation was at a 37-month high of 18.79⁒ in October, and cereals inflation has remained in double digits for 14 consecutive months now.

Overall, food inflation was 6.61⁒ last month, almost flat from September. Some economists are also concerned with the estimates for crop production for the summer sowing season, especially for pulses. They fear the weaker-than-expected outlook for production could also pressure the prices up or at least limit the pace of their fall.

The agriculture ministry's estimates put pulses output down by 15⁒ from last year.

No Cuts

The RBI is worried about food inflation, among other issues.

After the MPC review on October 6, RBI Governor Shaktikanta Das said that while declining core inflation is a silver line, the headline CPI inflation remains vulnerable to recurring and overlapping food price shocks.

The MPC remains highly alert and will not hesitate to take timely and appropriate action if the situation warrants, he had said, about possible rate hikes.

"It is emphatically reiterated that the inflation target is 4⁒, not 2⁒ to 6⁒. Hence, monetary policy needs to remain actively disinflationary at the current juncture," he had said.

Last week, well before the CPI inflation for October was released, Das repeated some of these comments.

The RBI is quite emphatic that it will not even change its stance from the present one of "withdrawal of accommodation" to a neutral one until it sees inflation durably at 4⁒, its main target rate.

"The question of neutrality will arise when you see inflation at around 4⁒ on a durable basis," Das had said.

Neutral would mean that RBI can act on interest rates in both directions. According to Das, once inflation reaches 4⁒ durably, it would afford the central bank the ground for a "rethink" on stance and policy action.

"I am saying 'ground for a rethink'. I am not going to say that we will cut 12 months down the road or so many months down the road because let us also accept that there have been multiple and overlapping shocks, and the global scenario also remains highly uncertain."

Apart from volatile food prices, the RBI will also have to consider geo-political tensions and the volatility in crude oil prices. Climate change, too, is putting more pressure on inflation.

The markets and the newspapers seem to think that one reading of good inflation gives hopes of cuts in interest rates. But the central bank thinks differently and has been emphatic in dissuading the markets from expecting rate cuts.

"Given that kind of a highly uncertain environment, it will not be desirable for the central bank to say that I will do this at this particular time because it will unnecessarily confuse the market, and it may not actually play out that way because of the uncertainties involved," Das had said.

Despite their penchant for quick pricing in expected rate changes, the markets will have to live with a higher for longer interest rate regime. And even when the central bank cuts interest rates, it could be, at best, a shallow one of 50 basis points in two stages.

The next few MPC meetings are going to be boring, pedantic, and repetitive. Or in other words, classic central banking fare.