Higher food inflation pushed the consumer price index (CPI) above the RBI’s medium-term target of 4 per cent in October. Household inflation came in at a 16-month high of 4.62 per cent, while the wholesale price index (WPI) hit a 36-month low of 0.16 per cent. Core inflation, too, hit a 94-month low of 3.47 per cent.
“We reiterate our call that lending rate cuts are the only way out of the on-going slowdown. The bad news
is that still-high real lending rates and relatively muted Diwali demand have led us to formalize a 30bps cut to our FY20 GVA growth forecast to 5.8 per cent on still-high real lending rates and relatively weak Diwali demand,” wrote Indranil Sen Gupta, director and India Economist at BofAML in a recent co-authored report with Aastha Gudwani, their India economist.
Dhananjay Sinha, chief economist at IDFC Securities, however, sees a 50 per cent chance of a rate cut, given the massive rate cuts already done which are yet to be fully transmitted to end-customers.
DOWNWARD REVISION IN FY20 GDP
Economists expect the RBI to cut FY20 GDP forecast to around 6 per cent in the December policy meeting, while revise the inflation target upwards to around 4 per cent for H2FY20.
“The new projection suggests that Q2FY20 GDP growth is likely to be 4.7 per cent. Despite favourable base effect, declining growth momentum suggests that even the H2FY20 will now be weaker than previously forecasted and is likely to come in at 6.2 per cent,” noted analysts at India-Ratings. They peg the FY20 GDP growth at 5.6 per cent.
The September quarter GDP growth rate fell to 4.5 per cent, slowest in over six-years, which bolsters expectations of another rate cut by the RBI.
During the October review meeting, the RBI had sharply reduced the FY20 growth forecast to 6.1 per cent from 6.9 per cent estimated earlier. Retail inflation projection, too, was revised upwards to 3.4 per cent for Q2FY20, while projections are retained at 3.5-3.7 per cent for H2Fy20 and 3.6 per cent for Q1FY21.
“We continue to track November inflation at 5 per cent, while see the inflation climbing to 4.6 per cent in November-February from 3.3 per cent in the April-September,” wrote analysts at BofAML in a note.
India-Ra, on the other hand, pegs the WPI and CPI to come in at 1.5 per cent and 3.9 per cent, respectively, in FY20, as against 4.3 per cent and 3.4 per cent in FY19.