Don't count an a quick rate cut

India's retail inflation plunged to 0.25% - the lowest since the current series began in 2013 - but the figure alone may not warrant a rate cut. The proximate reason for the October print is cooling food prices, and interest rate setters are wont to look through the headline number to core inflation. The adverse base effects from the year-ago period are about to wear off, and inflation may be at a point of inflection during this quarter. Effects of lower GST rates are showing up on the price line, but this is a one-off development. More important is the effect of the tax changes on consumption, which is expected to prop up demand. The economy shows little sign of slowing, and a likely trade resolution with the US could further lift growth.

RBI revised its growth projection upwards in October, factoring in the current inflation trajectory while keeping the interest rate unchanged. High-frequency data show the economy remains on track, with no need for premature action. The central bank has front-loaded its interest rate cuts, and residual action will be measured. The income and consumption tax cuts must work their way through the system before fresh monetary easing is called for.

It is too close to call the December meeting of MPC. Inflation is below RBI's target band for a second consecutive month. The latest full-year inflation forecast, however, is placed within the permissible range. Core inflation does not offer much headroom for rate cuts, so their timing should be decided for maximum impact. Tariff negotiations with the US add another element of fluidity to the calculation. So, although macroeconomic conditions have opened space for monetary policy to support growth, that support may not be needed immediately. The scope for rate cuts has opened during MPC meetings in December and February. Yet, it does not seem that RBI is in any hurry while it keeps the liquidity tap open.