The construction site of a commercial building in Mumbai’s central financial district is bustling with activity as a labourer stands on wooden scaffolding, working diligently. This image captures the essence of the Indian economy, which is currently experiencing a rise in inflation. Traders and analysts have responded to this development by pushing back their rate cut expectations, now predicting that the first cut will not occur until the middle of 2024.
The increase in food prices has played a significant role in driving up India’s annual retail inflation rate, which reached 4.81 percent in June. This surpassed the estimated rate of 4.58 percent and marked the end of four months of easing. Lead economist Madhavi Arora from Emkay Global stated that the markets are now anticipating inflation to exceed 6 percent in July, with potential upward pressure in the coming quarter. As a result, the expectation for the first rate cut has been shifted to June 2024, a delay of at least one quarter.
This sentiment is shared by three senior traders at private and foreign banks, who have noticed a considerable change in the market. The 1-year overnight index swap (OIS) rate currently stands at 6.75 percent, higher than its lowest point of 6.49 percent in 2023. Previously, the market expected the Reserve Bank of India (RBI) to cut rates in February or April of 2024. Now, however, a senior trader at a foreign bank revealed that no rate cut is anticipated in the OIS 1-year price. The only reason rate cuts are being considered in India is due to the influence of rate cuts in the United States.
The inflation rate is expected to remain at its current levels or potentially slightly increase in the future. Vegetable prices, in particular, have witnessed a significant 25 percent month-on-month rise in July, according to Abhishek Upadhyay, a senior economist at ICICI Securities Primary Dealership. He predicts that this increase could lead to a July CPI inflation rate close to 6.3-6.4 percent. Inflation is projected to remain around 6 percent in August as well, before gradually cooling. These forecasts may prompt the RBI’s rate setting panel to maintain rates at their current level for a longer period.
A senior trader at a private bank suggests that the RBI will likely overlook these inflationary prints, as they primarily stem from vegetable price inflation. The trader asserts that this inflation is seasonal and should not have any secondary effects. Additionally, since the Wholesale Price Index (WPI) continues to decline, core inflation is expected to remain stable.
Considering both the inflation and growth picture, the OIS market is now pricing in a rate cut around August next year. The growth of the Indian economy has remained robust, making rate cuts less necessary at this time.
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Omprakash Tiwary is a business writer who delves into the intricacies of the corporate world. With a focus on finance and economic landscape. He offers readers valuable insights into market trends, entrepreneurship, and economic developments.
