Inflation prints steady, but RBI will remain unmoved

The much-awaited CPI inflation for February was in line with market expectations and was only slightly changed from the January print. This data will unlikely influence any rethink from the Reserve Bank of India. At the April monetary policy review, the central bank will likely be as hawkish as it has been to prevent the market from prematurely building up expectations of a cut in interest rates or even diluting the monetary policy stance. The RBI will likely dilute the stance and cut rates simultaneously whenever it is ready to ease—or, at best, keep the two events as close as possible. A precursor to this would still be the rate cuts by the US Federal Reserve.

Steady Inflation

India's CPI inflation eased to 5.09⁒ in February from 5.10⁒ in January. Core inflation, which excludes fuel and food, eased to 3.3⁒ in February from 3.6⁒ in January. This is the lowest core inflation in the current CPI series, which began in January 2012. The inflation rate was slightly above market expectations of 5⁒.

Though the overall index rose 0.2⁒ from January, the statistical effect of a higher base prevented a rise in inflation. The latest CPI reversed the trend of sequential decline in the previous two months. It also reversed the sequential decline in food in the previous two months. The rise in food prices was mainly on account of the increase in prices of cereals and meat. Consequently, food inflation rose to 8.66⁒ from 8.30⁒ in the previous month.

Vegetable inflation rose to a seven-month high of 30.25⁒ in February, despite a marginal sequential decline in the index. The emerging pattern is high food inflation and low core inflation. The RBI will take heart from the fact that it has managed to keep the demand side of inflation under check.

However, given that the overall inflation is running high and food inflation can be generalized, the central bank will continue to keep its vigil.

Inflation is expected to fall sharply in the second quarter of next year with a high base effect coming into play. RBI has projected CPI inflation to fall to 4.0⁒ in July-September before starting to rise again in the subsequent quarters. In addition, US inflation has been warmer than expected. The February CPI printed at 3.2⁒, up from 3.1⁒ in January. It was higher than market expectations. The rise was mainly due to gasoline prices. Rents also rose.

Taken together, the data hinted at a possibility that would spook investors: that growth could keep slowing even while inflation plateaus above the Federal Reserve's target, making it difficult for the central bank to cut rates this summer.

Expectations are that the US Federal Reserve will delay rate cuts and could probably lower the quantum of the cuts, too.

The Federal Open Markets Committee will announce its decision on March 20.

According to the CME FedWatch tool, the chance of a 25-basis point cut by June has fallen to 50.4⁒ from 57.4⁒ a week ago. The estimate that the Fed could stand pat through its July meeting has risen to 24.1⁒ from just 8.1⁒ a week ago.

RBI Stance

For inflation to be at RBI's estimate of 5.0⁒ for the January-March quarter, March inflation has to be at 4.7-4.9⁒.

The RBI will await the outcome of the election, the full budget for 2024-25, and the progress of the monsoon before making a fresh assessment of what it needs to do about interest rates and monetary policy stance.

It will also closely watch the geopolitical developments. The expected thaw in the Middle East has not exactly materialized, and the rabble-rousing in Eastern Europe persists.

For now, it will continue to maintain a hawkish stance in April and July monetary policy reviews.

A key takeaway from the February MPC meeting was Governor Shaktikanta Das's efforts to kill expectations of rate cuts. He did not want the markets to front-run rate cuts.

"As markets are front-running central banks in anticipation of policy pivots, any premature move may undermine the success achieved so far," Das wrote in the February MPC minutes.

Executive Director Rajiv Ranjan echoed the sentiment.

Front-running by markets had slowed the policy transmission, he argued.

"Markets are currently running ahead of policymakers worldwide, including India. Any change in policy direction is going to have a multiplier effect. This is particularly tricky considering that transmission has slowed down in the last two months," he wrote in the February minutes.

The RBI will most likely keep up the hawkish messaging.

Inflation data for February only reinforces the belief that the Fed and the RBI will keep interest rates high for a bit longer.