RBI May Consider Rate Cut in February if Food Inflation Declines: ICICI Bank Report

Decline in food prices could pave the way for a rate cut as RBI navigates inflation and economic growth challenges.

New Delhi, December 24: The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) might consider a rate cut in February 2024 if food inflation shows a downward trend in January, according to a recent ICICI Bank report. The report suggests that easing food prices could create the conditions needed for a more accommodative monetary policy stance to support economic growth.

Food Inflation Holds the Key

The report highlighted that a potential deceleration in food prices in January would improve the odds of a rate cut in the upcoming MPC meeting in February.

“Expected deceleration of food prices in January could increase the odds of a rate cut in February,” the report noted.

Minutes from the most recent MPC meeting revealed a dovish tilt, with two committee members advocating for a rate cut. They argued that the slowdown in economic growth and limited transmission of food inflation to core inflation justified a shift towards easing monetary policy.

In contrast, other MPC members voted to maintain the current rates, suggesting that a more sustained decline in food inflation would provide a better window for a rate cut.

Inflation Trends Show Promise

According to official data, retail inflation in November stood at 5.48%, a decline from 6.21% in October. This fall aligns with the RBI’s comfort zone of 2-6%, strengthening the argument for potential monetary easing.

If this trend continues, the February MPC meeting could witness the first rate cut in recent times.

External Factors Impacting INR

The report also pointed out depreciation pressures on the Indian Rupee (INR), driven by a strong US dollar index (DXY) and the hawkish stance of the US Federal Reserve (FOMC).

This currency pressure has resulted in foreign portfolio investment (FPI) outflows worth USD 0.2 billion.

“Given the worsening external outlook, we expect the depreciation pressure on the INR to persist going forward,” the report stated.

However, it suggested that a lighter economic calendar in the coming weeks could offer some temporary relief to the rupee.

Looking Ahead: Balancing Domestic and Global Dynamics

The report underscores the complex interplay between domestic inflation trends and global economic pressures in determining the RBI’s monetary policy trajectory.

As food inflation moderates and the global economic scenario evolves, the RBI will need to strike a delicate balance between supporting growth and maintaining financial stability.

The upcoming months will be critical as the central bank assesses the data and prepares for its February policy review.