RBI has opted to maintain interest rates despite an economic slowdown and rising inflation, which hit 6.21% in October due to soaring vegetable prices and import duties on edible oils. A Reuters survey suggests inflation may decrease to 5.53% in November. Core inflation is stable at 3.70%. Economists note that food inflation factors are easing, and the RBI has lowered its growth forecast while raising inflation estimates. WPI inflation is expected to decline to 2.20%.
RBI Maintains Interest Rates Amid Economic Slowdown
Last week, the Reserve Bank of India (RBI) decided to keep its interest rates unchanged, aligning with predictions from a recent Reuters poll. This decision comes in the wake of notable price pressures, even as the economy experienced an unexpected sharp slowdown in growth during the last quarter.
Inflation Trends and Economic Forecasts
In October, inflation rose unexpectedly to a staggering 6.21%, primarily driven by the most significant surge in vegetable prices seen in nearly four years. Additionally, an import duty imposed on edible oils in September has further intensified these price pressures.
However, according to a median estimate from a Reuters survey conducted between December 4 and 9 among 56 economists, inflation, as indicated by the year-on-year change in the Consumer Price Index (CPI), is likely to have decreased to 5.53% last month. The forecasts for this data, set to be released on December 12 at 1030 GMT, varied between 5.00% and 6.10%, with only two economists projecting inflation to surpass the RBI’s tolerance range of 2% to 6%.
A decline in inflation would be welcomed by households in India, where food expenses constitute a substantial portion of their budgets. Rahul Bajoria, head of economic research on India and ASEAN at BofA Securities, noted in a recent report that “the prices of vegetables are showing the first signs of moderation, and edible oil prices are also stabilizing following the increase in customs duties.”
Bajoria further emphasized that this season’s harvests are expected to exert downward pressure on prices in the medium term. Meanwhile, core inflation, which excludes volatile items like food and energy, is projected to remain steady at 3.70% for November, based on the median estimate from a smaller group of 29 economists surveyed.
Dhiraj Nim, an economist at ANZ, remarked, “Overall, India’s high overall inflation remains closely tied to vegetable prices; excluding these, inflation is below 4%.” He added that various factors contributing to food inflation, beyond just weather conditions—such as the rising costs of agricultural inputs, increases in per capita income, and food demand—are beginning to ease, suggesting that food inflation may significantly decline in the coming months.
It’s important to note that the Indian statistics agency does not publish core inflation data. In a related update, the RBI has revised its growth forecast for the current fiscal year down from 7.2% to 6.6%, while simultaneously raising its inflation estimates from 4.5% to 4.8%, reflecting ongoing concerns regarding food inflation.
The survey also indicated that wholesale price index (WPI) inflation is expected to reach 2.20% in November, down from 2.36% in October.