RBI will remain on hold in February

Despite a lower-than-anticipated CPI inflation print for December, we do not expect that the Reserve Bank of India (RBI) will implement a cut to its benchmark repo rate at its upcoming monetary policy committee meeting on February 3-5. While we do believe the bank remains eager to cut in order to support the economic recovery in India from the pandemic crisis, recent statements and MPC minutes have revealed that the bank remains equally concerned about elevated inflation. As such, we anticipate ongoing wariness from the bank for the time being, but hold to our expectation that there will be a further rate cut later in the year, taking the benchmark rate from 4.0% to 3.75%.

Real rates remain negative

Source: Bloomberg, Emirates NBD Research

Inflation in India slowed to just 4.6% in December, down from 6.9% the previous month, and also coming in under Bloomberg analyst consensus projections of 5.0%. This was the slowest pace of price growth since September 2019, and gave rise to speculation that this would ease the way for the RBI to resume the rate-cutting cycle that was forcibly put on hold last year by the pandemic crisis and the elevated inflation we saw as a result. Inflation averaged 6.6% last year compared to 3.7% in 2019, confounding expectations that the cutting that began at 5.15% in February would continue further than the 4.0% it eventually settled at in May. While much of the rest of the world could continue to slash benchmark interest rates to record lows in a bid to support under-pressure economies, in India the rise in inflation forestalled these efforts, and the repo rate has been held at 4.0% since.

We have long maintained that Indian inflation would ease, leaving the bank room to cut further. Much of the elevated price growth we have seen has been related to dislocations caused by the pandemic crisis, and with a healthy monsoon promising bountiful harvests, the prospect for slower price growth was salient. However, we do not believe that the RBI will rush to resume its rate-cutting on the back of this one print, and that at the very least they will want to see the January inflation figures before making any changes. This is especially the case given that wholesale price inflation in December exceeded analyst expectations at 1.2% y/y compared to 0.9%.

Recent statements from the RBI support this view, as the board members were at the last meeting concerned over the persistent inflation, and the decision to hold was unanimous. Nevertheless, the MPC also remains committed to its accommodative stance in order to ‘revive growth on a durable basis and mitigate the impact of Covid-19 on the economy’, and as such we still expect a further cut from the RBI as soon as the inflationary environment allows. The latest industrial production figures for December showed a y/y decline of -1.9%, down from 3.6% growth in November and worse than expectations of a -1.0% contraction, illustrating the ongoing challenges to economic expansion.