As inflation eases, RBI to continue with accommodative stance: Economists

The August consumer price index inflation print came at 5.3 per cent, lower than the consensus of 5.6 per cent.

The surprise fall in August inflation gives the Reserve Bank of India (RBI) room to continue with its accommodation stance longer, and keep a lid on any criticisms about it, economists say.

The August consumer price index (CPI) inflation print came at 5.3 per cent, lower than the consensus of 5.6 per cent. This is also lower than what the Reserve Bank of India (RBI) had predicted. The central bank had expected inflation at 5.9 per cent for the second quarter ended September, and 5.3 per cent for the third quarter ended December.

The CPI print was at 6.3 per cent in May and June before cooling to 5.6 per cent in July.

The RBI has adopted an accommodative stance “for as long as necessary” till growth takes hold on a durable basis. But the recent inflation prints, bordering the upper range of the RBI’s 6 per cent target, made the monetary policy members spur on the policy path. External member Jayanth Varma voted against an accommodative stance in the policy, but the other five members favoured continuation of the stance, even as they expressed concerns about inflation.

Economists say much of those concerns will be taken care of by the latest print, and the central bank can take no action to change the stance in its October 6-8 monetary policy discussions.

Inflation could fall to 4.5 per cent YoY, or even 4.2 per cent in September if the current price momentum continues and “if onion and potato prices remain well behaved through the end of this month,” said Kaushik Das, chief economist of Deutsche Bank.

“If India manages to avoid a third wave post the festival seasons in October, then RBI can potentially increase the reverse repo rate by 20 basis points to 3.55 per cent in the December ’21 policy, while keeping the accommodative stance unchanged,” Das wrote in his report.

Aditi Nayar, chief economist of ICRA said policy normalisation could commence in February 2022, “with a change in the stance of monetary policy to neutral from accommodative, followed by a hike in the repo rate of 25 bps each in the April 2022 and June 2022 meetings.”

However, the wholesale price inflation (WPI) remains at a high level and came at 11.4 per cent in August from 11.2 per cent in July after two consecutive months of easing.

“The RBI will remain watchful of this process but continue to see comfort from the CPI prints,” wrote Indranil Pan, chief economist of Yes Bank.