Winter, Budget reins on rate cut

November inflation numbers were on expected lines at 5.5%. The moderation from October’s inflation print of 6.2% is the result of an almost two-percentage point fall in food inflation to 9% with fuel prices continuing to contract and core — non-food, non-fuel — inflation staying flat at 3.7%. This means that the broad inflation story remains the same. Food is what is keeping it above RBI’s target of 4%, and its future trajectory will largely be determined by movement in food prices. What happens to them is largely a function of how the climate rather than economy behaves going forward.

Although a bit delayed — and this has had an impact of sowing and possibly yields of key crops such as potatoes — winter seems to have set in finally. What will be needed to ensure a good crop (and supplies) would be a slightly prolonged winter. This is difficult to predict at the moment but there is also no reason to assume that it will necessarily not be the case. This has been the biggest X factor in India’s inflation targeting framework for quite some time now — and will continue to be, going forward.

To be sure, with important state elections out of the way, one could expect a more aggressive supply-side management strategy in food markets from the Union government which would help manage the adverse impact of food prices should things go south on the weather front.

Most independent economists are factoring in rate cuts in the next couple of Monetary Policy Committee (MPC) meetings although there are differences on the exact magnitude of reduction in interest rates in the near term. The next MPC meeting — it will take place after the Union budget has been presented on February 1, 2025 — will be under a new RBI governor, and one will have to see if there is a significant change in RBI’s approach to the inflation-growth dynamic. What will also have an influence on RBI’s take on this dynamic will be the Union budget and the approach it takes to boosting growth. A more aggressive fiscal consolidation could nudge it to adopt a more supportive role vis-a-vis growth. What will also play a role will be the qualitative (capital versus revenue spending) rather than just the quantitative aspect of the fiscal strategy in the budget.

It’s over to the winter and finance ministry on the inflation-growth dynamic for now.

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