The Reserve Bank of India (RBI) is expected to maintain its monetary policy rates for the current fiscal year, according to a recent financial poll. However, the central bank may pivot to rate cuts from the first quarter of FY25 due to various economic indicators and the evolving macroeconomic environment.
The RBI's Monetary Policy Committee (MPC) halted the cycle of rate increases in April 2023 after raising the repo rate by a total of 250 basis points since May 2022. The headline CPI inflation peaked at 7.4% in July, a 15-month high, and then slowed to 6.8% in August. It is predicted to decline further in September to between 5.3% and 5.5%, within the MPC's tolerance range of 2%-6%.
Bank of Baroda Chief Economist Madan Sabnavis anticipates that the RBI MPC will maintain the repo rate at 6.50%. He also suggested that the regulator might adjust the Q2FY24 inflation projection upward. Rajani Sinha, chief economist at CareEdge Ratings, attributed the current increase in inflationary pressures primarily to an acceleration in food costs due to weather anomalies.
Most analysts predict that the RBI's MPC will start focusing primarily on rate reductions in Q1FY25. Prasnejit K Basu, chief economist of ICICI Securities, expects the first rate drop of 25 basis points during the MPC's first meeting of FY25 in April 2024, following a successful Kharif harvest. Meanwhile, Achala Jethmalani, the chief economist of RBL Bank, predicts that the MPC will only change course to decrease rates between July and December of 2024.
As inflationary pressures are expected to moderate with resolved supply chain disruptions and increased domestic production, this may create room for the RBI to introduce rate cuts to stimulate further growth. Rate cuts generally reduce the cost of borrowing for consumers and businesses, potentially boosting consumer demand and investment in the country.
A future rate cut can lead to further compression in yields, particularly in the short to medium term segment. A stable rate environment might provide confidence to equity investors, reflecting the central bank's confidence in economic stability. However, rate cuts can exert depreciative pressure on the currency, depending on global capital flow dynamics at that time.
The RBI Governor-headed six-member Monetary Policy Committee (MPC) meeting is scheduled for October 4-6, 2023. The last meeting of the MPC was in August. The RBI had raised the benchmark repo rate to 6.5% on February 8, 2023, and since then it has retained the rates at the same level due to persistently high retail inflation and certain global factors such as elevated crude oil prices in the international market.
The actual decisions of RBI's monetary policy depend on a myriad of evolving factors. The RBI, with its mandate to maintain price stability and support economic growth, will likely remain vigilant and act based on real-time data and assessments. Investors and stakeholders are advised to keep a close eye on official RBI communications and global economic conditions.
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