We were expecting the policy rates to remain unchanged and that has turned out to be the case.Is inflation the major concern for RBI and for that it is all prepped up?
As of now, the last reported number for the inflation is 4.8% but we expect that the next month’s inflation numbers which will be reported next week are going to be around 6.75%, which is well above the RBI band of 4% to 6% and that is due to the base effect, the spike in the fuel prices and especially the sharp rise in the vegetable and fruit prices in the last one-and a -half month.
We know that the tomato prices have skyrocketed and today in the media we heard reports of onion prices going above Rs 35 to Rs 40 per kg bag. So, the headline number on the inflation side is expected to shoot up and at the same time on the global front also we now have a very clear messaging from the Fed that the rates are going to be higher for longer and it is in anticipation of that higher number of inflation that the market was building the possibility of a rate hike.
It is in that context that RBI has guided for a possibility of a rate action if there is a generalisation of that inflation. In that sense, as of now, the inflation looks well behaved in context of the last reported number but going ahead, the inflation trajectory looks very challenging.
Do you think the focus has shifted to the Indian economy rather than the triggers that we were getting from the global market?
Not exactly. The growth projections have remained unchanged at 6.5% and from looking at what is happening in other parts of the world like China which is undergoing deflation, 6.5% is a pretty strong growth number. The RBI does not obviously want to upset the growth momentum and any rate hike would obviously work towards that. So, they have to be very careful, which is why the current spike in the inflation is expected to be on account of high vegetable prices.
The food prices are generally very volatile and keep going up and down very quickly. So, RBI has considered that to be of a transient nature for now. They believe that by the next couple of quarters, the inflation on account of vegetables will come down again. If you look at the next quarter’s inflation projection, it is at around 6.2% but for the first quarter of FY25, inflation projection is at 5.2%, clearly suggesting that RBI expects the inflation to behave better going forward because the supply for the vegetables will improve and the prices will come down.
But if that does not turn out to be the case, if vegetable prices remain sticky or spreads into other components of inflation, which is what we call core inflation, then the Reserve Bank may have to take action. So, clearly the focus is on growth. They do not want to disturb the growth momentum and therefore they have taken a very patient approach towards inflation for now, considering it of temporary nature.
What about the 10-year bond yields now? How do you look at it factoring all of this?
There is a very established and clear trend that is developing in the market. If you look at the US, in spite of the Fed terminal rate expectations getting revised from about 4% in March to 5.5% now, the long-term rates in the US, the 10-year yield in particular, has largely been at around 4%.
In India, everyone in the bond market knows or expects at least that the inflation for the current month will be reported at somewhere between 6.5% to 6.75%. The oil prices have gone to a new high of 2023 at about $87. The commodity prices made a strong bottom in the first half of 2023 and the majority of the commodity prices are now showing an upward momentum. Therefore, it is very clear that the inflation has kind of bottomed out.
