RBI’s Rate Dilemma: Nov. inflation likely eased to 5%

India’s retail inflation is likely to have eased to around 5% in November from October’s 14-month high of 6.2%, with some cooling of food prices on a month-on-month basis though vegetable, pulses and edible oil prices remained elevated compared to last November, and home cooked vegetarian meal costs rose 7%, according to two price tracking reports.

Prices monitored by Bank of Baroda for its Essential Commodities Index rose 5.5% in November compared with 7% in October. “We expect the Consumer Price Inflation to settle around 5% in November, with risks tilted to the downside,” the bank’s economist Dipanwita Mazumdar said in a note, adding base effects would also provide some relief. However, core inflation, which excludes food and energy prices, has an upside risk from festive demand push, she reckoned.

The assessment assumes significance ahead of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) meet that concludes Friday, in the backdrop of a spike in October’s inflation and a sharp slump in economic growth with GDP rising just 5.4% in the July-September quarter. Union Ministers handling economic portfolios, and industry bodies like the Confederation of Indian Industry (CII), have called for interest rate cuts to support growth and encourage private investments.

The MPC, at its last review in October, had changed its policy stance to ‘neutral’ from ‘hawkish’, but reiterated it was “unambiguously” focused on durably aligning inflation to its median 4% target, terming the downward trajectory of inflation as slow and uneven. While 42 of 49 economists surveyed byBloombergexpect the central bank to hold the key repo rate at 6.5% this week, Nomura economists said the RBI is likely to surprise marketswitha 25 basis points (bp) rate cut, owing to weaker growth and a benign one-year forward inflation outlook. One basis point equals 0.01%.

“We do not see any policy trade-offs from lowering rates at this juncture. Wecontinue to expect100bp of cumulative cuts by mid-2025 to a terminal rate of 5.50%,” a Nomura note said on Thursday, stressing that India now appears in the midst of a cyclical slowdown and expectations of a sharp growth recovery in the second half of the year are not backed by data.

“The RBI’s primary objective is to maintain price stability, while keeping in mind the objective of growth… We have long held the view that growth sacrifice was on the rise… GDP growth has already moderated below trend, and should mean placinga higher weight on the growth objective of the mandate,” economists Sonal Varma and Aurodeep Nandi said.

November relief

Onions led the relative respite on the food inflation front, with prices dropping 4.4% in November — the first such contraction since July 2023 — from a 44% surge in October.

However, despite some downturn from October levels, tomato and potato prices remained a pain point for consumers last month, with a rise of 35% and 50%, respectively, from a year ago, Crisil’s monthly tracker of food costs showed. The average cost of a vegetarian meal stood at ₹32.7 in November, 2% below October’s cost, while a non-vegetarian plate needed ₹61.6. This was the second highest price for both categories in 15 months.

This is the first time since August that vegetable meal costs have risen in single digits, following an 11% uptick in September and 20% spike in October. Overall food inflation as per the official retail price rise gauge, had surged to a 15-month high of 10.9% in October, with vegetable inflation at 42.2%.

The price of pulses rose 10% from last November while vegetable oil prices rose 13%, as per Crisil’s monthly Roti Rice Rate report said. An 11% drop in fuel cost helped temper the rise in food plate costs.

Wholesale prices of tomato, onion and potato, are also on the deflationary path so retail prices could correct further, even as the winter harvest comes in, Ms. Mazumdar averred.

Non-vegetarian meal costs rose 2% year-on-year in November, marking the second month of uptick after a year of declines. Pushan Sharma, director-research at CRISIL Market Intelligence and Analytics, reckoned such increases will persist for a few months owing to low base effects from last year.

“A surge in supplies from Madhya Pradesh, Maharashtra and Gujarat led to a 17% [sequential] decline in tomato prices in November, easing the cost of a veg. thali. Potato and onion prices rose due to reduced supplies, with potato arrivals down 27% and onion arrivals down 28% on-month, preventing a further decline in vegetarian plate cost,” Mr. Sharma noted.