Chennai, Feb 5 With the retail inflation down, if the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) pause on the policy rate hike or increase it by 25 basis points to 6.50 per cent will be known on February 8.
The RBI's MPC will be meeting on February 6-8 to decide on the rates.
"Inflation has come down substantially over the last three months and showing further downward momentum. External conditions have also eased with slower rate hikes in the US. The RBI's foreign exchange reserves have also increased over the last few months. All these developments should provide comfort to the RBI. We expect the RBI will pause the rate hiking cycle in the February meeting and will maintain the repo rate at 6.25 per cent for extended period. It might also change the policy stance to neutral," said Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC.
According to Pathak, the bond market should react positively. "We expect bond yields to go down gradually though elevated bond supply will limit the downside of yields."
Retail inflation for December 2022 fell to a year's low of 5.72 per cent, mainly due to low food prices, especially those of fruits and vegetables.
This was the second consecutive month when it has remained within the RBI's tolerance band of 2 per cent to 6 per cent.
However, economists are worried as the core inflation remains on the higher side.
The consumer price index (CPI) based inflation was at 5.88 per cent in November 2022, according to data released by the Ministry of Statistics and Programme Implementation on Thursday. In October 2022, it was at a higher band of 6.77 per cent.
Food inflation stood at 4.19 per cent in December 2022, lesser than 4.67 per cent level of November 2022, as per the official data.
Apart from fruits and vegetables, prices of oils and fats as well as meat and fish also fell in December 2022 compared to November 2022.
On the inflation numbers Rajani Sinha, Chief Economist, CARE Ratings had told : "Retail inflation has eased more than expected in December, bringing the headline print below the RBI's upper tolerance for the second straight month."
The softening is largely attributed to the decline in prices of vegetables, which helped offset the rise in costs of other products of the food basket such as cereals, milk and meat. However, the concern is that core CPI inflation remains sticky above 6 per cent, with evidence of high inflation in the services sector. "From the policy perspective, we believe that RBI's move at the February MPC meeting will be a close call with core CPI inflation remaining sticky," she had added.
At the MPC meeting held during December 5-7, 2022 Prof. Jayanth R. Varma, a member voted against the resolution to hike the repo rate by 35 basis points to 6.25 per cent.
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