India soft CPI reading // When can we expect a change in Monetary Policy Stance and the first of Rate Cuts?

India CPI came in below consensus estimates of 5.5%. Headline number came in at 5.02% yoy and Core CPI number (excl F&B + Fuel and Light) came in at 4.53%.

Headline number has decelerated from a peak of 7.44% in July to 5.02% in Sep 2023. The Q2 inflation averaged 6.43% in line with RBI estimates. Under the food category, cereals, pulses and spices continue to be sticky. The core print has been steadily decelerating from the 6.00% peak seen in Feb 2023 to 4.53%.

With the current deceleration, my estimates for Q3 average 5.36% (RBI estimates 5.60%) and for Q4 average 4.80% (RBI estimates 5.20%). Next Financial Year Q1 will be sticky around 5.07% and Q2 will be closer to 4.2% average.

Fed Fund rates will also be an important determinant of domestic rate policy. Fed Fund Futures Market are pricing in a full rate cut by June. Assuming the current interest rate trajectory plays out in the US as per market pricing and domestic inflation averages 4.80% by Q4 of this FY, RBI could be seen changing the monetary policy stance in Q4 ( note by this time real rates would be in very restrictive territory of over 170 bps) followed by rate cuts in Q1 of next financial year. Here, bear in mind, in the last MPC, RBI had stated that a pivot in policy will come from a durable decline in inflation towards 4%.

OIS markets are lower on the day. Snapshot below:

There are multiple other variables competing for attention - slippages in fiscal deficit in an election year // Bond Index inclusion flows // FPI flows ahead of election // Liquidity // Growth. We revisit them later.

Please note here my estimates are based out of the historical trends and do not account for any projections in variables or change in trends witnessed in most recent years. These are crude calculations to visualize where monetary policy is headed. I leave the task of forecasting to my more learned Research friends.

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