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Amid elevated inflation, MPC may defer rate cut next month

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Amid elevated inflation, MPC may defer rate cut next month

New Delhi : The elevated inflation is unlikely to push the Monetary Policy Committee (MPC) to effect any immediate rate cut in its policy next month but a cut thereafter may be possible owing to the possibility of a sharp reduction in inflation in line with tepid demand conditions, analysts said on Tuesday.

“The retail inflation and WPI inflation data released yesterday do not indicate any major build-up. While this will reassure the RBI, the elevated retail and rising core inflation seems to rule out a rate cut in the next policy. We expect a 50bp rate cut thereafter during FY21,” Anand Rathi said in its research report on inflation.

The report added that after remaining flat in Aug’20 vs Jul’20, inflation is likely to soften modestly in the next two months due to the base effect. A steeper fall is likely thereafter, and this may once again give an opportunity to the MPC to look at rate cuts to boost the economy.

The data released by the National Statistical Office (NSO) on Monday showed that India’s August retail inflation remained flat at 6.69 per cent, down marginally from 6.73 per cent in July.

As per the data, Covid-19 seems to have changed the food habits of people. Accordingly, at 9.1% in Aug’20, food inflation was the lowest since Nov’19.

While inflation in prices of pulses, cereals, meat, spices and milk softened, that of eggs and alcoholic beverages hardened.

But core inflation remained at a 22-month high at 5.8%, while inflation for transport and communication, personal care, and footwear accelerated. In addition, several essential items remained in the high-inflation zone. These include pulses, edible oils, spices, and vegetables.

India is bucking the global deflationary trend. Inflation in India – both overall and core – remains in the top three of the major economies (G-20) while the country also has one of the lowest (negative) real policy rates of these economies, the brokerage report said.

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