The October monetary policy review, the month’s most awaited policy event, kept interest rates unchanged but shifted gears to ‘neutral’ from ‘withdrawal of accommodation’. Hence, the Reserve Bank of India (RBI) can now move interest rates to either side. The position can be considered easing compared with the tightening bias in the previous stance.

Which leads us to the million-dollar question: When will the RBI cut rates?

The central bank has reiterated it wants to align headline inflation to its 4% target on a durable basis. For this to happen, food inflation needs to come down on a durable basis. The RBI’s retail inflation forecast for the current year is 4.5%, which it expects to ease to 4.1% by next fiscal. In a way, it sees future inflation aligning to its target.

We expect a rate cut in the December policy provided food inflation and the Middle East do not play spoilsport. The big if in this is food inflation. Past data shows without taming food inflation, headline inflation cannot be tamed to 4.0% on a durable basis. This is hardly a surprise since food and beverages have a 46% weight in the consumption basket.

Hence, food inflation is the fulcrum on which monetary policy will turn. Food inflation has traditionally been the idiosyncratic component of inflation, volatile and difficult to predict. The changing monsoon patterns and rising frequency of heat waves, largely attributed to climate change, have further complicated food inflation dynamics. Little surprise, therefore, that in its October monetary policy, the RBI announced setting up of a data repository which will integrate climate risk information.

The September inflation print, which surprised on the upside, is a testimony to the food inflation risk. Overall inflation spiked to 5.5% led by 9.2% food inflation. Within food, vegetables inflation was at 36%. This surpasses expectations of forecasters and played out even with monsoons being 8% above normal this season.

This month’s theme focusses on the intricacies of this year’s southwest monsoon — its distribution over time and geographies, and episodes of excess and unseasonal rains which impact agricultural output and food inflation. In the base case, given monsoon has been above normal and the reservoir position healthy, we expect agriculture to do well and food inflation to ease.

The good news is foodgrain inflation is softening due to plentiful rains. There is no good news on the vegetable front till now. Vegetable prices deviated from their typical decline during winter in 2023 due to persistent shocks from inclement weather, be it abnormal rainfall or heat. In the coming months, we expect vegetable inflation to ease in winter with a fresh harvest.

However, we are keeping our fingers crossed.