Food inflation to stay sticky, rate cuts may get pushed to FY26: Economists

The central bank is unlikely to consider softening rates this fiscal year even after the consumer inflation gauge declined below the mandated 4% target for the first time in five years, with economists attributing the fall to a statistical base effect and might not indicate a durable victory against sticky prices just yet.

Most of the experts that ET spoke with said rate cuts could be pushed to the next fiscal year.

In the recently concluded monetary policy review, central bank governor Shaktikanta Das maintained that future interest rate decisions will depend on food price movements and that it cannot overlook inflation pressures.

The Reserve Bank of India (RBI) also revised its inflation projections for both this quarter and the third quarter of FY25 upward by 60 basis points and 10 basis points, respectively. One basis point is a hundredth of a percentage point.

Inflation this quarter is expected at 4.4%, and 4.7% in the third quarter.

“Latest inflation data (3.54%) is likely to be fleeting, as we expect inflation to inch up back to 5% by September 2024. We do not see any impact on monetary policy from this data. We continue to expect a rate cut in 2025 unless growth falters,” said Nikhil Gupta, chief economist, Motilal Oswal.The key risk to the inflation trajectory stems from food inflation. Food items together carry a weight of around 46% in the Consumer Price Index (CPI) basket, contributing to more than 75% of headline inflation in May and June. Vegetable prices contributed about 35% to inflation in June. Pulses inflation was at 14.77%, and vegetables at 6.83% in July.”There is no rush to cut the policy repo rate at this juncture, given the resilient domestic growth momentum, and inflation in the second half likely remaining above RBI’s medium-term target of 4% despite base effect. Our baseline expectation of a 50 bps cut in the repo rate in the first half of 2025 may be brought forward to the December 2024 quarter if above-normal monsoons this year cause a downside surprise to CPI inflation,” said Tanvee Gupta Jain, Chief India Economist at UBS Securities.

Under the flexible inflation-targeting regime, the RBI has to maintain CPI in the 2% to 6% range. The central bank is aiming to bring down inflation to 4% on a durable basis. Headline CPI inflation reduced to 3.54% in July, up from 5.08% in June 2024.

“We can expect a rate cut by December only if everything goes according to RBI’s projection,” said Madan Sabnavis, chief economist at Bank of Baroda. “I think 4% to 4.5% is a number that the RBI should be comfortable with, provided it stays there for 4-6 months. In the past, they have cut rates at this number,” he said.

A few economists also believe that the rising rate cut probability at the forthcoming meeting of the US Federal Open Market Committee (FOMC) could have some implications for the response function of the RBI. In July, the Fed had signalled it could start lowering rates as soon as mid-September amid easing inflation and a cooling job market.