From ‘elephant’ to ‘horse’—Reserve Bank of India (RBI) Governor Shaktikanta Das’ outlook on inflation seems to have seen a shift. What was ‘slow moving’ is now ‘agile’ and needs to be kept on a tight leash. What brought about this shift in analogy? According to retail data for September, retail inflation has seen a 5.5% year-on-year jump on the back of an increase in vegetable prices.
“The RBI governor stressed that though the risk of inflation is diminishing in the medium term, multiple factors could impact it in the short term. This stance indicates that the RBI has turned cautious and continues to remain hawkish in the short term to ensure inflation is under check,” says Deepak Ramaraju, Senior Fund Manager of financial services company Shriram AMC. There are numerous factors at play—right from the US Federal Reserve’s shift in policy and rate cut guidance, rising geopolitical tensions, China’s stimulus to arrest economic slowdown, to Japan’s surprise decision to raise interest rates.
But experts are not reading too much into metaphors. “RBI’s tone remains focussed on the growth-inflation balance while keeping its eye on external factors,” says Anitha Rangan, Economist at Equirus, another financial services player.
While holding the repo rate for the 10th time at 6.5%, the RBI has changed the policy stance to ‘neutral’, possibly hinting at the first rate cut in the December meet or at next year’s policy meet. “We believe that the RBI was waiting for the monsoons to get over as food inflation has been their top concern over the last many months,” says Puneet Pal, Head-Fixed Income of PGIM India Mutual Fund, a global investment management firm.
Global factors are also going to dominate monetary actions. If the US Fed continues to cut rates, there will be a spillover effect. “In the past, we have seen the US dollar weakening when interest rates are cut in the US. A weaker dollar has resulted in higher commodity prices globally. So, history can be expected to be repeated. We are seeing the dollar index retreating against the basket of currencies after the US Fed cut the interest rate by 50 basis points,” says Rangan. She says potentially, while a US rate cut does give India some elbow room, the RBI is not likely to match the US Fed from policy to policy.
Pal says the key point is what the terminal US Fed funds rate and the real positive rates will be in this monetary cycle. “Emerging markets like India can benefit from higher FPI, or foreign portfolio investment flows, as the US Fed starts lowering rates,” he adds.
The rise in the prices of some commodities like steel, copper, and oil also poses a threat. “The measures undertaken by the Chinese central bank can boost growth in the medium term. This can also lead to a rise in commodity prices and the demand can increase for commodities like crude oil, base metals and steel in the medium term. However, China is an export-oriented economy, and its growth story depends on the global demand environment improving,” says Ramaraju. That could take some time to materialise, he adds.
The jury is still out, reasons Rangan, primarily because there is no meaningful stimulus yet and China continues to remain in deflation.
Geopolitical tensions since March 2022 have also been instrumental in disrupting the global economy, with wild swings in oil prices, which have now stabilised.
“With oil below $80/bbl, even if geopolitical tensions escalate, one can think that India’s oil risk will be well within manageable limits,” says Rangan.
India, now, has several trading partners for oil. In addition, it is pushing for more renewable energy, which, in the medium term, gives it high energy security. While there could be near-term risks and inflationary pressures, geopolitical tensions have not escalated to a level where they raise meaningful concerns, adds Rangan. “RBI’s guard is perhaps to keep a watchful eye on these factors and not rush into rate action prematurely,” she adds.
Pal of PGIM India Mutual Fund believes India’s decision to increase imports of Russian crude to insulate itself from the uncertainty of crude oil prices has helped. “The government has also been proactive in managing food inflation through fiscal and administrative measures that have proved effective in controlling imported inflation and we expect a similar approach to continue in the future,” says Pal.
Experts also suggest that the impact of these conflicts has already been discounted into inflation. According to Ramaraju, there can be a drop in some commodity prices if the geopolitical tensions ease.
For now, the RBI is on a wait-and-watch mode.
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