Experts say the timing of the rate cut is linked to the inflation rate reaching 4 per cent; however, the RBI might only be in a position to cut rates either in the August policy or even later
Even as the RBI MPC‘s decision on April 5 to keep the repo rate unchanged at 6.5 per cent was fully in line with analysts’ expectations, there are now talks of interest rate cuts. Experts expect the RBI to start lowering interest rates from October 2024. However, they said the timing of the rate cut hinges on the inflation rate reaching 4 per cent.
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Deepak Ramaraju, senior fund manager at Shriram AMC, said, “As expected, the monetary policy committee decided to keep the interest rates unchanged. However, it’s important to note that the timing of the rate cut is linked to the inflation rate reaching 4 per cent. This creates some uncertainty about when the rate cut will happen.”
Currently, India is in a deflationary zone, but there are upward pressures from food prices (due to the El Nino factor) and crude oil shocks that can add to the uncertainty. The market is concerned about a potential delay in the rate cut, which could cause it to remain range-bound in the near term.
Indranil Pan, chief economist at YES Bank, said, “With an unchanged inflation projection for FY25 at 4.5 per cent, with growth conditions improving and with the US Fed also pushing out its rate cut cycle, we think that the RBI might only be in a position to cut rates either in the August policy or even later.”
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He added that while one can remain confused about the timing of the cut, the confidence is on the fact that the rate-cutting cycle in India will be shallow in FY25.
Parijat Agrawal, head (fixed income) at Union Mutual Fund, said, “We expect rate cuts in the third quarter of FY25, possibly after the US FOMC starts the rate cut cycle. The RBI is expected to keep liquidity neutral so that further transmission of higher rates can continue.”
He said the softening of core inflation gives sufficient room to MPC. However, volatile food inflation and the recent uptick in crude and other commodity prices are to be watched. The strong momentum in growth also gave comfort to MPC to align the CPI on a durable basis to 4 per cent.
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Suman Chowdhury, chief economist and head (research) at Acuité Ratings & Research, said, “The central bank would continue to be watchful about the increased crude oil prices and any upward risks in food inflation in the near term, given the forecast of an intense upcoming summer season. Given the tone of the MPC statement and the expectation of strong domestic growth, we believe that there is a low likelihood of any rate cut by RBI before October 2025.”
The RBI has retained the CPI inflation forecast at 4.5 per cent for the current fiscal, while the FY25 GDP growth has been pegged at 7 per cent.
The RBI’s monetary policy committee on Friday decided to keep the repo rate unchanged for the seventh time in a row, at 6.5 per cent. The monetary policy stance continues to be ‘withdrawal of accommodation’.
The RBI MPC also kept the SDF unchanged at 6.25 per cent, and MSF and Bank Rates maintained at 6.75 per cent. The SDF is the lower band of the interest rate corridor, while the MSF is the upper band.
