Will rising consumer inflation end RBI rate cuts?

With food prices predicted to taper off, the RBI is expected to continue with rate cuts instead of increasing them

Salil Panchal
Published: Jan 1, 2020 10:32:12 AM IST
Updated: Jan 1, 2020 10:45:21 AM IST

Life is not a template and neither is mine. Like several who have worked as journalists, I am a generalist in my over two decade experience across print, global news wires and dotcom firms. But there has been one underlying theme in each phase; life gave me the chance to observe and tell a story -- from early days tracking a securities scam to terror attacks and some of India's most significant court trials. Besides writing, I have jumped fences to become an entrepreneur, as an investment advisor -- and also taught the finer aspects of business journalism to young minds. At Forbes India, I also keep an eye on some of its proprietary specials like the Rich list, GenNext and Celebrity lists. An alumnus of Xavier Institute of Communications and H.R College of Commerce and Economics in Mumbai, I have worked for organisations such as Agence France-Presse, Business Standard, The Financial Express and The Times of India prior to this.

g_125801_cpi_inflation_280x210.jpgImage: Shutterstock

India’s consumer Price Index (CPI) inflation was at a three-year-high—of 5.54 percent in November, led by rising food prices. Usually, to control high inflation, central banks hike interest rates, which raises the cost of borrowing and lowers the supply of money. This lowers demand for goods and services, and lowers inflation.

For a long time now, until 2019, India’s inflation has been low and interest rates have dropped. But with retail inflation rising, will the RBI end its rate cut cycle (and start to hike rates), considering that it continues to adopt an ‘accommodative’ stance in its monetary policy and that in December it kept rates on hold?

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It appears not. The pause in cutting interest rates further at the last monetary policy was temporary, not a long one. It is also apparent that the prices of expensive vegetables are likely to taper off soon. Their supplies are improving, while  imports from Egypt and Turkey is boosting supplies and lowering wholesale prices.

This means inflationary pressures will start to ease, and CPI inflation will drop. The RBI will start to cut rates once again, for which it has clear room; there could well be at least two more rate cuts in 2020. A delayed or irregular kharif harvest could prompt a rethink, but is unlikely.

Rate cuts also appear to be the more prudent move, in the short term, considering that India is in the midst of an extended slowdown.

(This story appears in the 17 January, 2020 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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