The RBI is unlikely to reduce rates at all in the next year as food prices continue to impart volatility to headline retail inflation, while economic growth remains strong according to Axis Bank’s outlook for 2024.
Food inflation is likely to remain volatile, with new supply shocks, compounded by the rising incidence of erratic monsoons, cyclonic disruptions, and hailstorms. While tomato prices fell in September and October, prices of cereals, pulses, and onions are rising. Despite export restrictions on wheat and rice, rising global prices have affected local prices. Such shocks increase the risk of entrenching inflation expectations, Axis Bank said in a report.
“Food inflation is likely to remain volatile, with new supply shocks, compounded by the rising incidence of erratic monsoons, cyclonic disruptions, and hailstorms” said Neelkanth Misha, chief economist, Axis bank. “ Strong growth conditions are likely to support inflation in the near to medium term, while a revival in capex checks core inflation. Hence, policy rates are unlikely to fall in CY24, though effective rates could be impacted by the improving fiscal balance and tight liquidity conditions”.
Annualised core inflation is currently below the 4% target, though global factors like surge in gold prices and strength in housing rents could push core inflation up. The policy challenge though would come from volatility in food inflation, keeping inflation above the midpoint of the target for most of next year, according to the Axis report. “ Tight liquidity conditions, equivalent to a 25-30 bps rate hike, can ease once global risks fade” it said.
India’s GDP growth is surprising positively despite several headwinds: fiscal consolidation, higher domestic interest rates, tightening liquidity conditions, and slowing exports of goods and services.We expect further 70/20bps upgrade to FY24/25 consensus forecasts, making India’s growth revisions second only to the US’s, Axis said.
