Foreign banks expect the Reserve Bank of India (RBI) to keep policy rates unchanged till end-September, given the strong growth prospects for the economy along with lower core inflation.

The consensus is also that the consumer price index (CPI) inflation will inch up to 5-5.1 per cent in May 2024 from the 11-month low of 4.83 per cent in the previous month. With the market repricing the intention of the Fed and RBI to achieve the 4 per cent inflation target, rate cuts will likely be slow and shallow, they said. 

April CPI inflation moderated to 4.8 per cent year-on-year, slightly softer than 4.9 per cent last month and in line with market expectations. Food inflation remains a concern, rising 7.9 per cent year-on-year, led by a rise in vegetable and cereal prices. The elevated annual food inflation at 7.9 per cent was driven by double-digit inflation in vegetables (27.8 per cent year-on-year in April) and pulses (16.8 per cent).

Radhika Rao, Executive Director and Senior Economist, DBS Bank, said May inflation is tracking close to 5.0-5.1 per cent on firmer food prices.

“For the central bank, strong growth prospects alongside lower core (below 3.3 per cent) and contained inflationary expectations will continue to keep policy in a comfortable hold in the first half of the fiscal year,” Rao said. 

Shreya Sodhani, Regional Economist, Barclays, said in a research note that based on Monday’s data and early price indicators for May, Barclays is tracking CPI inflation for May at 5 per cent year-on-year. Prices of food items will likely rise in the summer, she added.

Costly vegetables

The seasonal rise in food prices is preventing a sustained disinflation in headline — which has been repeatedly flagged by the RBI. “We thus expect the MPC [monetary policy committee] to monitor monsoon season effects and the corresponding trajectory of food inflation, and keep a hold on the policy rate. We expect the MPC to begin with rate cuts in Q4 (Oct-Dec) 2024, with the balance of risks towards a December cut rather than October, in our view,” said Sodhani in the Barclays research note.

Pranjul Bhandari, Chief Economist, India and Indonesia, HSBC, said in a note, “With the recent repricing of Fed rate cuts, we do not expect the RBI to embark on any easing soon. In the June meeting, the MPC members are likely to retain their policy stance”.

The food price data for the first 12 days of May indicate that headline inflation is currently tracking at a slightly elevated level than in April, and in line with the RBI fan chart. While prices of cereals and oils may have eased in May, vegetable prices remain elevated, led by higher priced potatoes. Going forward, food crop production needs to be closely monitored amid heatwaves in some part of the country, Bhandari added.