November Retail Inflation Strengthens Case for February Rate Cut

New Delhi, December 13, 2024 — November's retail inflation figures have bolstered the argument for a potential interest rate cut by the Reserve Bank of India (RBI) in February. According to data released by the Ministry of Statistics and Programme Implementation, inflation eased to 4.3% in November, down from 4.6% in October. This marks the third consecutive month of declining inflation, signaling a gradual stabilization of price pressures.

Key Drivers of Inflation Decline

The moderation in retail inflation is attributed to a significant drop in food prices, particularly vegetables and cereals. Food inflation, which constitutes nearly half of the Consumer Price Index (CPI), stood at 3.5% in November compared to 4.1% in October. Core inflation, which excludes volatile items like food and fuel, also showed a marginal dip, standing at 5.2%.

Experts attribute the easing price pressures to improved supply chains and government interventions in key markets. "The sustained decline in inflation aligns with the RBI's comfort zone of 2%-6%, enhancing the likelihood of a policy rate adjustment early next year," said an economist at Nomura.

RBI’s Stance and Market Reactions

The RBI held its key repo rate at 6.5% during its December monetary policy meeting, emphasizing a cautious approach amidst global uncertainties. However, Governor Shaktikanta Das hinted at the possibility of a rate cut in 2024, conditional on inflation maintaining its downward trajectory.

Bond markets have responded favorably to the inflation numbers, with yields on 10-year government securities declining by 8 basis points, reflecting increased investor confidence in an accommodative monetary stance. Equity markets also showed optimism, with the BSE Sensex closing 0.7% higher on expectations of improved borrowing conditions.

Implications for Borrowers and the Economy

A potential rate cut in February would be a boon for borrowers, reducing the cost of loans for individuals and businesses. It could also provide a much-needed stimulus to sectors like real estate and manufacturing, which have been grappling with high borrowing costs.

However, economists caution against complacency. "While the numbers are encouraging, external risks such as fluctuating crude oil prices and global monetary tightening could pose challenges," noted an analyst from CRISIL.

Outlook

The November inflation data serves as a key input for the RBI’s upcoming decisions. Policymakers will closely monitor December's inflation figures and global economic trends before finalizing their stance. For now, the easing inflation strengthens the case for a February rate cut, offering a glimmer of relief to India’s economic landscape.