Since GDP estimates depend significantly on company data, subdued corporate performance is likely to play a role
The consumer price index-based inflation rate surged to a 14-month high of 6.2 per cent in October. The increase has prompted several economists to revise their policy rate-cut expectations. Some economists were expecting the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) to reduce the policy rate in the upcoming December meeting. However, this increase would not have come as a surprise to those following the RBI’s position. In his latest policy statement, RBI Governor Shaktikanta Das noted that “… moderation in headline inflation is expected to reverse in September and likely to remain elevated in the near term due to adverse base effects, among other factors”. At a Business Standard event last week, Mr Das emphasised the inflation rate in October could be higher than that in September. The actual number, thus, has been largely on expected lines.
In terms of rate cuts, the RBI has categorically stated it will wait for the inflation rate to align with the medium-term target of 4 per cent durably. Thus, until concrete signs are visible, the MPC is unlikely to start reducing the policy rate. To be fair, the inflation rate is being driven by food prices and the core rate is running below the target of 4 per cent. The food inflation rate in October was over 10 per cent, pushed up largely by vegetable prices. However, despite the recent debate on food vs core inflation, it is well accepted that the central bank cannot ignore it. The law also mandates it to target the headline inflation rate. The RBI expects the rate to average 4.5 per cent this financial year. It expects it to moderate to 4.3 per cent in the first quarter of 2025-26.
The timing and extent of the rate cut will depend on the projection for the full financial year 2025-26. The latest Monetary Policy Report shows the RBI’s baseline inflation projection for the fourth quarter of 2025-26 is 4.1 per cent, which is much closer to the target of 4 per cent. The food inflation rate is expected to come down in the coming months because of improved agricultural production owing to a good monsoon. However, the expectations of a rate reduction may also be driven by a slowdown in economic activity. Lower than expected gross domestic product (GDP) growth rate at 6.7 per cent in the first quarter was explained partly by a low government capital expenditure owing to the Lok Sabha elections. While the government’s capital expenditure has picked up, it is not sufficient to compensate for the loss in the first quarter. Further, as an analysis of the second-quarter corporate results by this newspaper showed, profits for the sample companies declined for the first time in eight quarters.
Since GDP estimates depend significantly on company data, subdued corporate performance is likely to play a role. Meanwhile, several fast-moving consumer goods companies have flagged demand slowdown in urban areas. Maruti Suzuki Chairman R C Bhargava told this newspaper recently the passenger-car segment was unlikely to grow above 4 per cent for a few years. All this indicates a demand slowdown. The GDP data for the July-September quarter will be released later this month. A broad-based slowdown will complicate the RBI’s policy choices. Thus, along with inflation outcomes, it will be interesting to gauge growth. A potential economic slowdown will, however, need intervention beyond policy rate cuts by the RBI.
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