Interest rate hold likely as inflation at its weakest in 18 months

By Eltaf Najafizada

Consumer prices in India are showing further signs of moderation, giving the central bank room to keep rates on hold after an aggressive tightening campaign dampened demand and muddled the wider outlook for the economy.  

Inflation rose 4.76% last month from a year earlier, the slowest pace since October 2021, according to the median estimate in a Bloomberg survey of economists ahead of data due 5.30 p.m. local time on Friday. This is the third straight month of cooling prices and brings the marker closer to the mid-point of the Reserve Bank of India’s 2%-6% target. 

Easing inflation will bring relief to policy makers when the economy is facing headwinds from geopolitical tensions and slowing global demand. With higher borrowing costs weighing on India’s world-beating growth, the central bank put the brakes on its tightening cycle in April, while leaving the door open for maneuvering until the “war against inflation” is over. 

 

“We expect the RBI to stay on an extended pause,” said Shumita Deveshwar, chief India economist at TS Lombard. “Steep rate hikes over the past year will hurt growth more than they can curb inflationary pressures as the lagged impact of a tighter monetary policy is felt in the economy.” 

Policy Pivot
 

Slower inflation is partly driven by “some moderation in commodity prices,” economists led by Rahul Bajoria at Barclays Bank Plc wrote in a note, expecting the RBI’s preferred core inflation measure — which strips out volatile food and fuel prices — to continue to inch down further, although at a “slower pace” than the headline number.

The decline in inflation is expected to help the central bank’s six-member Monetary Policy Committee leave the benchmark rate unchanged for the second time when it meets on June 6-8. While Governor Shaktikanta Das described the MPC’s April decision as a “pause, not a pivot,” his deputy Michael Patra has said he sees the economy transitioning into a “low inflation regime.”

What Our Economist Says...
 

“Disinflation of this magnitude in two successive months should put to rest any concerns about inflation and allow the central bank to extend its rate hold at its June review.”

— Abhishek Gupta, Bloomberg Economics

The RBI’s pause is in line with the pivot by global central banks. The US Federal Reserve lifted interest rates by a quarter point last week and hinted it could be the last increase for now. The impact is reflecting in India’s debt markets, with the benchmark 10-year yields hovering around 7% — the lowest level in more than a year. 

Political Gains
 

Containing price pressures is equally important for Prime Minister Narendra Modi whose ruling party is fighting hard to retain power in a key state this week and ahead of national elections next year where the leader will seek a third term. Inflation has been a hotly-debated campaign issue in recent local ballots and is a key worry for voters. 

Although price pressures have eased, unseasonal rains and rising housing costs are the new risks on the minds of policy makers. Earlier this month, Finance Minister Nirmala Sitharaman said inflation is “slightly above” a tolerable level and the government is working to control it. 

While the government has boosted imports of certain items such as edible oils to rein in inflation, it’s falling global commodity prices that have primarily contributed to slower price gains, with wholesale prices falling 0.30% in April from a year ago, according to a Bloomberg survey as of May 11. The gap between the two gauges is widening as manufacturers refrain from fully passing on the fall in input costs to end-consumers to protect margins.

Lower crude oil prices and supply chain management by the government should keep inflation in check, Aditya Vyas and Sadhika Nimbutkar, economists at STCI Primary Dealer Ltd. wrote in a note. “A tight monetary policy affecting aggregate demand will result in lower growth prints and softer inflation prints” this year, they said. 

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