Pricey vegetables, dal may push back rate cut

The cut in key interest rates that emerged in the speculative horizon following the sharp decline in retail inflation to 4.25% in May receded in the distance with several economists warning that the stubborn rise in prices of vegetables and dal might push up the inflation anywhere between 10 and 30 basis points.

A basis point is one-hundredth part of a percentage point.

May was a time of delight for policymakers with retail inflation touching a 25-month low. It was the third successive month of decline with the rates in March and April recorded at 5.66% and 4.7%. But the party could be spoilt in June, economists have warned.

Vegetables play villain
Though RBI predicted an average retail inflation of 5.1% for entire FY24, economists have alerted that in the worst-case situation the rate might rise to 5.3-5.5%. If vegetables and dal play the villain to that extent, the cut in key interest rates that India Inc and many retail borrowers are waiting for might be pushed back even beyond the last quarter of FY24 as was being speculated since the retail inflation of May was announced.

Incidentally, food items have about 46% weightage in the retail inflation basket. The weightage that vegetables and dal enjoy in this basket is about 8.4%.

“If prices remain high, RBI may not go for a rate cut in early 2024,” remarked chief economist of Bank of Baroda Madan Sabnavis. Earlier, he had said that a possible cut might take place in February next year.

Das’ worries
On its part, RBI governor Shaktikanta Das had signalled satisfaction at the declining rate of inflation but had said in early June that there was no room for complacency and there was need for a hawk’s eye on inflation to finetune policy to prevent it from rearing its ugly head. In fact, the RBI chief had warned that El Nino might play spoilsport by impacting agriculture output. The progress of the wouthwest monsoon would be significant in ensuring agri production, the bank’s note said.

In its monetary policy meeting in June, RBI did not change the repo rate – the rate of interest at which it lends to banks – from 6.5%. It was the second time that they held that rate at that level.

Incidentally, RBI bears the mandate to keep retail inflation within the 2-6% band, but Das made it clear that they would try to bring it down to 4%.

Expert views
S&P Global Ratings also projected that a rate cut – probably to the tune of 25 basis points or 0.25% might be in the offing early next year.

ICRA chief economist Aditi Nayar also thought that the persistently high prices of vegetables dampened any prospect of interest rate cuts in this calendar year.

Sonal Verma and Aurodeep Nandi, economists of Nomura Securities, also said that the surging price of vegetables made it stiffer for the RBI to risk a rate cut.

In fact, Parag Jasrai, senior economist analyst of rating agency Ind-Ra, added that the excessive rains in in north India could lead to further spikes in prices by disrupting the supply chain of vegetables and other food items.

The Bank of Baroda economist cautioned about a possible onion shock in October.