Federal Reserve’s recent 50 basis point (bps) rate cut may make the Reserve Bank of India (RBI) consider a similar move. However, a rate cut from the RBI is unlikely this year, with a potential announcement expected only in February 2025, according to an SBI Research report.
“As such, we don’t anticipate any rate action by RBI in calendar 2024. An early 2025 rate cut (February) looks the best bet as of now. We still believe that liquidity challenges will remain for the banking sector with government cash balances progressively moving out of the banking system,” said the report.
India’s retail inflation rate has eased to 3.65% year-on-year in August 2024, a near five-year low.
Although inflation is expected to rise in September and October, the report says that CPI inflation should stay below or close to 5% in the next few months. For the entire financial year 2024-25, average inflation is predicted to be between 4.6% and 4.7%, staying within the RBI’s target range of 4-6%.
Economic Affairs Secretary Ajay Seth on Sep 19 said that the US Federal Reserve’s rate cut should not be directly linked to any potential action by the RBI. He said that the Fed acted in the best interest of the US economy, while the RBI will focus on addressing India’s domestic economic conditions.
Also Read: Fed cuts rates for first time since 2020: What happens to inflows and rates in India?
He said that while the US Federal Reserve has acted in the best interests of the world’s largest economy, the RBI will make its decision on interest rate cuts based on what suits the Indian economy.
When asked about the possibility of the RBI cutting interest rates, Seth mentioned that the decision rests with the MPC, which would act at an appropriate time based on what benefits the Indian economy.
RBI Governor Shaktikanta Das has suggested that a rate cut may take longer, as the central bank wants to bring dwn the inflation rate to the medium-term 4% target on a durable basis.
The SBI report also noted favorable monsoon activity, with a 7% surplus, positively impacting Kharif sowing, which reached 109.7 million hectares. Paddy sowing saw a 2.1% increase compared to the five-year average.
As of September 17, Kharif crop sowing was 0.1% higher than the usual area and 2.2% more than last year. Paddy sowing, in particular, rose by 2.1%, covering 41 million hectares compared to the five-year average.
On the monetary front, the report states that the RBI has kept liquidity tight to control inflation. The government’s surplus cash balances averaged ₹2.8 lakh crore, while the durable/core liquidity surplus increased to ₹3.19 lakh crore as of September 18, with an average of ₹3.9 lakh crore since the last monetary policy update.
