Citi Sees RBI Rate Cuts Getting Delayed In These Four Scenarios

Inflation in May beat estimates by falling below expected figures, driven by stable food prices, and the lowest ever core inflation.

Consumer price index inflation for the month fell by 8 basis points to 4.75% against the year ago figure, below analysts' estimates of 4.85%.

Core inflation, which excludes changes in food and energy prices, reached a new low of 3.1% for the series that started in 2012.

Despite the lower-than-expected figures, Citi analysts expect a post-election price surge, led by telecom and fast-moving consumer goods, with a headline figure of 4.6% for the first quarter of the current financial year.

The months of June and July hold two key events, which could impact the monetary policy committee's decision to cut policy rates later during the year, according to a Citi note.

"RBI's reassessment of the real neutral rate (to be published in the June monthly bulletin) and the July budget could be critical inputs for MPC’s rate cut decision," the brokerage said.

Present estimates suggest two rate cuts of 25 basis points each in October and December. However, the note suggests four scenarios under which the cuts could be further delayed:

• The assessment of the real neutral rate, which could be published in the June monthly bulletin by the Reserve Bank of India, comes higher than the Covid period estimate of 80–100 basis points.

• If the RBI's aim to see at least two-quarters of a close-to-4% inflation print doesn't happen.

• A negative surprise from monsoons is leading to a renewed risk on food prices.

• The July budget presented an "unlikely large" rural stimulus, leading to potential inflationary consequences.

A renewed surge in prices amid June inflation could be seen from the delayed hike in telecom prices, which had been last changed in December 2021. Citi analysts expect the hike will happen within the second quarter of the year, leading to a 25–30 bps rise in core inflation.

With the elections having passed, Citi notes it may be noteworthy to look out for price corrections in other categories as well, with the example of a 5% hike in highway toll charges.

Monsoons, which had been impacted due to the El Nino period, have weakened rapidly, according to the Indian Meteorological Department. The country is expected to see 'above normal' rainfall between June and September.

As the street faced a surprise in Lok Sabha election results, a shift in budgetary spending towards welfare schemes was built in.

There will be a shift towards more focus on welfare spending, Herald van der Line, head of Asia equity strategy at HSBC Global Research, told NDTV Profit.

"We've seen a kind of disjunction between rural recovery and urban recovery in India, with urban recovery being very strong, and rural recovery being much slower," he said.

Dealing with that imbalance is very important, and some form of welfare spending may be on the cards, he said.