Rate cut unlikely in February, inflation expected to ease in January, says SBI research

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A rate cut by the Reserve Bank of India (RBI) is unlikely even in February due to the ongoing inflationary pressures, according to a recent report by SBI Research. The report states that while inflation is expected to ease slightly from January 2025, it will be largely driven by base effects, rather than a significant cooling of underlying price pressures.

SBI Research forecasts that inflation will average around 4.8 percent to 4.9 percent in the financial year 2025, which is still above the RBI's target of 4.5 percent. The easing of inflation from January onwards is expected to be gradual, largely owing to base effects from the previous year. This has led the research team to revise its expectations regarding a rate cut in February, with the first rate cut now anticipated to occur later than initially expected.

As per the data released by the Ministry of Statistics and Programme Implementation, food inflation in India stood at 10.87 percent in October, with vegetable inflation reaching a staggering 42.18 percent. This has contributed to a sharp rise in overall inflation, with India's retail inflation recorded at 6.21 percent in October, surpassing the RBI's upper tolerance limit of 6 percent. Several states, including Chhattisgarh (8.8 percent), Bihar (7.9 percent), and Odisha (7.5 percent), are experiencing inflation rates higher than the national average, according to the report.

The report also highlights a stark disparity between rural and urban inflation, with inflation in rural areas exceeding urban inflation by 1.07 percent. This is primarily due to the higher weight of food items in the rural inflation basket (54.2 percent) compared to the urban basket (36.3 percent), as food prices continue to rise.

While the report anticipates some moderation in vegetable prices in November, it suggests that CPI headline inflation may remain above 5 percent for both November and December. Additionally, the volatility in the currency markets could provide the RBI with further justification for not signalling an early rate-cut cycle, with higher inflation potentially serving as a buffer to delay such decisions.

Overall, the outlook for inflation and interest rates remains cautious, as the RBI is likely to adopt a wait-and-see approach before making any rate adjustments, especially in light of the ongoing inflationary pressures and market uncertainties, as per the SBI Research report.

(With inputs from ANI)