New Delhi, Dec 13 (Mayank Nigam) Indian headline CPI for the month of November is providing impetus to end of rate hike cycles in India, according to Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India. While the domestic inflation may still come under control due to hawkish monetary policy being followed by RBI, as long as US inflation does not come under control, Fed may have to increase rate giving incentives for capital outflows from emerging markets resulting into exchange rate volatility and currency depreciation, he said. Ghosh said after the lower CPI inflation for Nov’22, we have revised down our estimates for the remaining months of this fiscal.
We believe CPI inflation will remain at 6.5%-6.7% for Dec’22 and Jan’22. Thereafter inflation will decline materially coming down to 5% by Mar’23. For Q1 FY24 we expect average CPI of 4.4%. We now maintain a minimal probability of a February terminal 25 bps rate hike. However, that will also be accompanied with a change in stance to neutral, if it was to happen so. The next policy statement is due on Feb 6-8 and just comes after the budget announcement on Feb 1 and after the FOMC policy statement on Jan 31-Feb11, first in 2023. From that point, RBI will be in a vantage position of taking a considerate view in February policy. Yields are also now likely to move towards 7%, aided by low SDL borrowings, he said. Remarkably, consumer non-durables suffered significant contraction during the month explaining nearly 57% of the total decline during the month. It declined on monthly basis as well. This is worrisome as it reflects slackening pace of rural demand, Ghosh said.
He said US CPI data release tomorrow together with FOMC meeting scheduled consecutively this week are important not just in global context but also in Indian context. Fed, to account for lag in rental inflation reporting, relies on private surveys of rents and home prices and substitute them in CPI account, in order to validate their policy decisions. While the time of large increases in rates is certainly over, however, the strategy for now is to being watchful of the comforts provided by CPI numbers. While higher than expected drop of US October CPI showed headline inflation dropping to 7.7% instead of market expectation of 8% has provided some comforts however US NFP data showed US Non-Farm payrolls was 263K in November against the expectation of 200K, and 284K in October, giving impetus for Fed to pursue rate hike cycles of smaller magnitudes as reflected in increasing wages, stagnant unemployment rate, and increasing job openings, Ghosh added.