RBI May Limit Interest Rate Hikes as Inflation Peaks and Eases

A sharp decline in the Consumer Price Index (CPI) in October and expectations that prices have reached their peak levels may temper the Reserve Bank of India's (RBI) interest rate hike cycle, despite volatility in local food prices and global interest rates. The CPI for October fell to 6.77%, from 7.41% a month earlier, largely due to softer food prices. Economists anticipate consumer prices to ease from here, although core inflation remains elevated.

Key Takeaways:

• The CPI for October fell to 6.77%, a decrease from 7.41% in the previous month, primarily due to softer food prices.
• Economists believe consumer prices have peaked and are likely to ease, although core inflation remains elevated.
• The RBI's rate hike cycle may be limited if inflation continues to wane and the pressure on the rupee eases.
• Radhika Rao, senior economist at DBS Bank, expects the RBI to dial down the scale of the hike in December to 35 basis points, after three consecutive 50-basis point increases.
• Yes Bank's Indranil Pan still predicts a 50-basis points hike in December, citing uncertainties in US rate hikes and sticky food prices.
• The Wholesale Price Index (WPI) fell to a 19-month low of 8.39% in October, driven by easing prices of food, fuel, and manufactured items.
• Garima Kapoor, economist at Elara Capital, expects non-crude oil commodity price correction and seasonal softening in food prices to moderate inflation in the second half of 2022-23.
• HSBC economists Pranjul Bhandari and Aayushi Chaudhary believe the RBI's focus may shift towards growth, as India's GDP growth is expected to slow over the next few quarters.
• Ratna Sahay, India's Economic Affairs Secretary, expects inflation to slowly ease in the coming months.

Statistics:

• CPI for October: 6.77%
• Previous month's CPI: 7.41%
• RBI's benchmark repo rate increase: 190 basis points since May
• RBI's letter to the government explaining inflation: October 2022
• Expected inflation for the fourth quarter of the fiscal: 6.50% (Yes Bank)
• Expected repo rate hike in this fiscal: 40-50 basis points (Elara Capital)
• Expected repo rate by the end of 2022-23: 6.4% (HSBC)
• WPI in October: 8.39%, a 19-month low

Sources:

• Radhika Rao, senior economist, DBS Bank
• Indranil Pan, chief economist, Yes Bank
• Garima Kapoor, economist, Elara Capital
• Pranjul Bhandari and Aayushi Chaudhary, HSBC economists
• Ratna Sahay, India's Economic Affairs Secretary
• RBI's letter to the government (October 2022)