A sharp jump in India's retail inflation for September has prompted several economists to push back domestic rate cut bets to the first-half of 2025 from early December, with some citing growth as a bigger factor that could determine the timing of an interest rate reduction.
Annual retail inflation (INCPIY=ECI) clocked in at 5.49% in September, its highest level in nine months, due to rising food prices. It rose sharply from 3.65% in August and was above economists' forecast of 5.04%.
"September CPI print has reaffirmed our view that despite a stance change, near-term inflation risks do not favour a December rate cut," economists at CitiBank said in a note.
"While our base case remains Feb-2025 rate cuts, we continue to see risk of further delay to Apr-2025 as inflation could still be averaging 4.5% by the time of Feb-2025 MPC (Monetary Policy Committee) meet," they added.
The Reserve Bank of India (RBI) held rates steady at 6.5% for a tenth straight meeting last week but eased its stance to 'neutral' from 'withdrawal of accommodation', raising expectations of a rate cut as early as December.
Food inflation, which accounts for nearly half of the consumption basket, rose to 9.24% in September, compared to 5.66% a month prior. Economists expect food inflation to peak in October and see high chances of the overall inflation print climbing further.
"The Committee is unlikely to ease until it has some confirmation of the winter disinflation and CPI heading back towards 4%," economists at JP Morgan said.
"Therefore, we push out our first cut to the February meeting under the assumption that headline CPI continues to soften after October and is seen to progressively head below 4.5% in early 2025."
RBI Deputy Governor Michael Patra said last week that the central bank will look through the upcoming inflation "hump" and then make a decision, while Governor Shaktikanta Das said considering the significant risks that lie ahead, it would not be appropriate to specifically talk about the timing of a rate cut.
"We believe the first cut could be based on growth, and need not be inflation based, because inflation number may remain somewhat sketchy in coming months," Soumya Kanti Ghosh, an economist at State Bank of India, said.
High-frequency indicators such as the manufacturing PMI slowed to an eight-month low in September, while the services PMI eased to a 10-month trough, latest data showed. India's overall growth slowed to 6.7% in the June quarter.
