A sizzling heat wave in large parts of the country will raise concerns for India’s policymakers already grappling with sticky inflation, potentially pushing back the timing for interest rate cuts, economists said.
The nation’s weather office on Monday predicted hotter-than-usual temperatures across the country in the three-month period through June, with a high probability of heat wave episodes lasting as long as 10 to 20 days in certain regions.
“A heat wave could potentially slow the disinflation process and keep prices of vegetables elevated,” Teresa John, an economist at Nirmal Bang Institutional Equities Pvt, said by phone. “Our base case for interest rate cuts was June, but now August or October seems more likely,” she said.
The pace of inflation in India has remained above the central bank’s 4% target for the last few months, giving policymakers reason to remain cautious. The Reserve Bank of India has kept its benchmark rate unchanged for six straight policy meetings and is scheduled to hold its next monetary policy review on Apr. 5.
Governor Shaktikanta Das has said rate cuts won’t even be considered until the RBI is sure price growth has settled durably around its goal. India’s strong economic growth in the October-December quarter is another reason for policymakers to stay on guard. India’s economy is estimated to have expanded 8% or higher in the fiscal year ended in March, with officials predicting over 7% growth in the current financial year.
The extreme weather outlook however could put pressure on the agriculture sector ahead of nationwide polls in three weeks, in which Prime Minister Narendra Modi is seeking a third consecutive term in office. India’s farm sector, which employs close to half of the nation’s working population, contracted 0.8% in the final three months of 2023.
“We expect rural demand is likely to stay cautious,” Aditi Nayar, an economist with ICRA Ltd., said by phone, adding that the central bank will watch these developments closely. She expects the RBI to commence monetary easing only after October.
