Why is a status quo most likely?

The panel is expected to keep the repo rate unchanged at 6.50% for the fourth consecutive time as core inflation, which excludes food, fuel and light groups, has been below the central bank’s upper tolerance limit of 6% for six months. This offers some respite from high food prices. MPC was hawkish at the August meeting, saying it would “maintain a close vigil on the evolving inflation scenario”. While inflation has surprised on the upside, mainly due to vegetable prices, softening of core inflation at the same time and steady economic activity may not warrant any action now.

Has the inflation dynamic changed?

Yes, and this makes a status quo call more complex than it looks. Inflation jumped from 4.87% in June to 7.44% in July and 6.83% in August. The sharp jump came from vegetable inflation, which has averaged 31.8% in these two months. While vegetable prices have corrected somewhat, cereal and pulses continue to rise. More worryingly, the recent surge in crude oil prices from around $85 per barrel in early August to $95 currently could play an important role in setting the tone. At the same time, bond yields have hardened by around 10 basis points due to the volatile global scenario.

Will there be any change in projections?

RBI is expected to keep its gross domestic product (GDP) and inflation projections unchanged at 6.5% and 5.4%, respectively for 2023-24. While RBI had projected inflation at 6.2% for July-September, the average for July-August has been much higher at 7.1%. However, this may get offset during the rest of the year with vegetable prices cooling down.

Where are food prices headed?

At the time of the last MPC meeting in August, tomato prices were a big issue. Now, tomato prices have corrected sharply, declining 64.6% in September compared to July. But then, onion prices started rising. In the last two months, they have risen 25.9%. Potato too has risen, albeit only 2.8%. To make matters worse, cereal, pulses, sugar, salt and milk prices are also up. The continuous rise in food prices could weigh on MPC’s discussions as they form 40% of the inflation basket and can sway headline inflation.

What is the likely road ahead?

Inflation is likely to come in below 6% in 2023-24, which will help MPC bring down inflation to 4% in a steady manner. Rising crude prices do pose an upside risk, with Nomura projecting that every $10 per barrel increase could lead to a 25 basis point rise in inflation. This, along with the hardening of bond yields, will keep MPC on its toes. The emerging situation has also increased MPC’s dependence on fiscal measures, which means the government may have to step in to check prices amid supply-side shocks and rising oil prices.