The Asia-Pacific headwinds

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) stood pat during its review on October 6, 2023, and retained its stance of withdrawing accommodation. Looks like interest rates will remain higher for longer with a rate cut likely only in the first quarter of the next fiscal as systemically important central banks are not done with their hikes and, more importantly, risks to domestic inflation loom.

Soon after this non-move, consumer inflation slid to 5%. But this was no surprise. The RBI’s inflation forecast for July-September at 6.4% had implicitly assumed 5% inflation in September. The fall in inflation is merely a correction of the hump created by the spike in vegetable inflation, which has now corrected. For the second half of this fiscal, CRISIL expects consumer inflation to average 5.4%.

The upside risks to inflation from food (particularly cereals, pulses and spices) persist and new risks from crude oil are brewing as the conflict in Gaza intensifies. Additionally, the impact of an erratic monsoon on kharif production, ongoing El Niño conditions and low reservoir levels bear watching.