India’s Rate-Cut Calls At Risk After Inflation Picks Up Sharply

Economists are reviewing their forecasts for interest rate cuts in India after inflation accelerated faster than expected last month, fueled by surging food prices.

Several economists, including Upasna Bhardwaj of Kotak Mahindra Bank Ltd. and Gaura Sen Gupta of IDFC First Bank Ltd., say the Reserve Bank of India is unlikely to cut interest rates in December as previously predicted, after data Monday showed consumer prices rose at the fastest pace this year in September. Banks like Goldman Sachs Group and Deutsche Bank AG said they still expect the RBI to ease in December, although the risk has increased it may be pushed out to next year.

“The near-term inflation profile will remain close to 5%, which will likely keep most rate-setters members cautious,” said Kotak’s Bhardwaj, who now expects a reduction in the first half of next year.

The RBI last week shifted its policy stance to neutral to indicate a pivot soon. Governor Shaktikanta Das has kept the benchmark rate unchanged for more than 20 months, and has repeatedly said he wants to bring inflation down to the 4% target level on a durable basis before he considers easing.

September’s inflation was higher than the 5.1% median forecast in a Bloomberg News survey of economists, and followed August’s reading of 3.65%. On a month-on-month, prices rose 0.6% in September after a no change in August.

The spike in inflation was triggered mainly by food prices, which make up about half of the consumer price basket, and which climbed 9.24% in September from a year earlier. Vegetable costs surged 36%. Excluding the volatile food and fuel categories, the core measure of inflation accelerated slightly to 3.56% from 3.44%.

The higher-than-expected spike in vegetable inflation “poses some risk to our call of the start of the RBI monetary policy easing cycle in December,” Goldman Sachs’ economists Santanu Sengupta and Arjun Varma wrote in a note. However, some of the increase in vegetable prices should reverse in October and there could be a “sharp sequential contraction” in November-December on arrivals of fresh harvests.

While the RBI had predicted inflation would climb in September, the sharper than expected gain was worrying, economists said. Citigroup Inc. economist Samiran Chakraborty, who had earlier predicted rate cuts to start from February next year, now expects the central bank to move only in April.

“The higher-than-expected surge in India’s inflation in September poses a risk to the consensus expectation that the central bank will begin its easing cycle in December. The jump in price gains above the Reserve Bank’s 4% target — and possibly a further acceleration this month — is likely temporary. Still, the magnitude of the price gains means we may review our call for a 25-basis-point cut in December.”

—Abhishek Gupta and Ankur Shukla, Bloomberg economists

However, there are signs that inflation may moderate in the coming months due to above-normal rains. India recorded its best monsoon season in four years, setting the stage for a bumper harvest of crops such as rice, and boosting economic prospects for rural areas.

The latest inflation print “reduces but does not remove the scope for RBI to still cut rates in December,” given the spike was driven primarily by perishable components, said Bank of America Corp. economist Rahul Bajoria. He said there are downside risks to the RBI’s economic growth forecast of 7.2% for the year through March, which may require the central bank to lower interest rate faster.