India's Consumer Price Inflation Index is likely to fall from 196.5 in November to 192.0 in February (i.e. next month's reading) as per my calculations. This would peg the consumer price inflation rate at 3.3% y-o-y (i.e. index was 185.8 in Feb 2024).
The main drivers of the fall are the 70% drop in Tomato and Onion prices in the last two months, 30% drop in Potato prices, 10% fall in Sugar prices, and 20% fall in imported Coal prices, among others (such as Steel, Iron ore etc.). Indeed, almost all commodity prices in the inflation basket have dropped appreciably since November.
With no cyclical pick-up in the economy noticeable, core prices too are expected to stay muted (salaries/services, housing, freight rates, etc.).
Moreover, next year's CPI readings now have a high base effect as the index had touched 190 as early as June 2024.
Other things being equal, Governor Malhotra would have had adequate room to cut rates by about 250bps this calendar year. There is limited room for any sort of fiscal stimulus and therefore it is up to the RBI to provide whatever little stimulus is possible to the economy.
He has made a nervous start thus far; overnight money is still hovering in the 6.75% range, far from above the repo rate of 6.50%.
It would appear therefore that he is nervous about the rupee's potential depreciation and the knock-on effects on inflation. The wonks at the RBI have probably convinced him that tightening rates is "appropriate" when the currency is under pressure. This despite the fact that India's inflation basket is more domestic in nature and that demand in the core economy remains weak.
Therefore, we are staring at a Third Consecutive Policy Mistake in succession by India's hallowed central bank. The first was monetary over-tightness last year, the second was over-defence of the rupee, particularly last quarter.
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