India’s retail inflation surged to a 14-month high in October, exceeding the Reserve Bank of India’s (RBI) upper tolerance limit, dampening expectations of an imminent policy rate cut. Retail inflation, measured by the Consumer Price Index (CPI), climbed to 6.21% year-on-year in October, compared to 5.49% in September. This marks the highest level since the 6.83% recorded in August 2023.
The uptick comes shortly after RBI Governor Shaktikanta Das cautioned that October’s inflation reading could be “very high.” The data has effectively dimmed market optimism for a potential repo rate reduction in the December monetary policy meeting. Earlier, there were hopes for a rate cut following a cumulative 75 basis points (bps) reduction in the US Federal Reserve‘s benchmark interest rates over its last two meetings.
However, analysts now anticipate a more measured rate-cutting cycle by the Federal Reserve and expect the RBI to remain cautious. The central bank is likely to prioritize domestic macroeconomic stability over external influences and avoid any premature adjustments to its policy stance.
Impact on Stock Market
The Indian stock markets extended their losing streak, with the benchmark indices Sensex and Nifty 50 logging their fifth consecutive session of declines on November 13. The sell-off was triggered by the 14-month high CPI inflation data, coupled with unfavorable global cues.
From their respective peaks, the Sensex and Nifty 50 have corrected sharply by over 9% each, driven by substantial foreign portfolio investor (FPI) outflows amid high valuation concerns, subdued corporate earnings, and portfolio rebalancing. Persistently high inflation and expectations of a delayed rate-cut cycle, potentially extending beyond February 2025, are expected to weigh further on domestic market sentiment.
Analysts suggest that while October’s CPI inflation data was largely anticipated by the Indian stock market, the more pressing concern lies in subdued corporate earnings.
“Markets are now factoring in the possibility of an RBI repo rate cut in February. However, a larger worry is the strengthening US dollar and weaker-than-expected Q2 corporate results. While inflation is projected to ease in December, a rate cut in the next RBI policy could exacerbate the already depreciating rupee,” said Vinod Nair, Head of Research at Geojit Financial Services.
Nair anticipates a slower trajectory for interest rate cuts in 2025, with the market’s focus shifting towards earnings growth.
“It is crucial for markets to see an improvement in earnings growth during Q3. High-frequency indicators are expected to show positive trends this quarter, which could support earnings growth. However, if earnings fail to improve, valuation downgrades may follow,” he added.
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