With the Reserve Bank of India maintaining a status quo on rates and stance, analysts say that the central bank may cut rates in the August policy review or in the October policy announcement.
The timing of a rate cut, however, presents a nuanced challenge. Forecasts suggest a temporary dip in Headline Consumer Price Index (CPI) inflation to 3.8 percent in Q2FY25, followed by a projected uptick. Consequently, analysts anticipate the rate cut to materialize closer to the October policy announcement rather than in August. Nevertheless, any reduction in rates is expected to be cautious, with no deep cuts anticipated.
The RBI’s outlook on inflation hinges significantly on evolving food price dynamics. Optimism persists that food inflation will remain manageable, bolstered by expectations of a favourable rabi crop and a normal monsoon, anticipated with the transition from El Nino to La Nina. However, concerns linger over adverse weather conditions, especially given below-average water reservoir levels and declining groundwater tables in many regions.
Commodity prices a challenge
Additionally, escalating commodity prices pose a challenge. The uptrend in Brent crude prices, coupled with optimism surrounding the Chinese and US economies and OPEC+ oil cartel’s production cuts, raises apprehensions. Higher crude oil prices have a trickle-down effect on edible oil prices, with limited room for domestic price control amidst global inflationary pressures.
The RBI’s observations for Q1FY25 underscore concerns over rising input costs for services and infrastructure sectors. While input costs are expected to rise, infrastructure firms may refrain from passing on these costs to consumers.
During the Monetary Policy press conference, the RBI Governor emphasized that India’s monetary policy trajectory is primarily dictated by domestic factors, downplaying the influence of the US Federal Reserve. However, the historically low India-US interest rate differential suggests the RBI may await cues from the Fed before making any moves. Market expectations for a Fed rate cut in June 2024 have waned amid resilient economic data, signalling a potential shift towards a hawkish stance.
