While shifting policy stance from the withdrawal of accommodation to neutral, RBI Governor Shaktikanta Das kept everyone guessing on the trajectory of interest rate hikes when he remarked that one has to be very careful in opening the gate as the inflation horse may bolt again.
“As December MPC approaches, the growth slowdown in India will become apparent, as inflation aligns itself to the 4% target. We expect repo rate cuts of 100bp by December 2025, beginning December 2024. If rate cuts are delayed or smaller, downside risks to growth would rise,” said Bank of America economist Rahul Bajoria.
Like BofA, a majority of analysts are now predicting that the RBI will begin its much-awaited rate cycle on December 6 as a change in stance means that the RBI sees a possibility forming for a rate cut.
“We think the shift to a neutral stance opens doors for rate cuts potentially starting December 2024. In our view, demand has softened of late, core inflation is near series low, and fiscal policy is on a path of consolidation. Besides, the Fed has commenced easing. Thus, a gradual reversal in rate cycle may be on the cards,” said Kapil Gupta, Executive Director- Research, Nuvama Institutional Equities.
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CareEdge Ratings is of the opinion that a shallow rate cut of 25 bps in the December policy, followed by another 25 bps in the March policy, is possible provided food inflation moderates.
“While the Central Bank remains optimistic on growth, some moderation in recent high-frequency economic indicators like core sector, PMI Manufacturing, GST collections, and passenger car sales also give reason for the RBI to look at rate cuts going forward. Expectations of further rate cuts by major global Central Banks including US Federal Reserve are also supportive of a rate cut by RBI,” said Rajani Sinha, Chief Economist, CareEdge Ratings.
However, RBI still wants to keep a close watch on shifting risk perspectives and their consequent impact on Indian inflation – both higher and lower.
“Every policy thus becomes live from now on though there is no guarantee for a December cut as India inflation will pass through a brief period of higher (possibly >5%) inflation prints before cooling again. The hope comes from a good SW monsoon and healthy kharif sowing while reservoir levels and soil moisture conditions remain favourable for Rabi crops. The trepidation on clearly calling for a win against inflation comes from global conditions whereby food and metal prices have perked up,” Indranil Pan, Chief Economist at YES Bank, said.
The hawkish points from RBI monetary policy come from the commentary around inflation which indicated that there is some distance to cover with upside risks from geo-politics and weather while the agricultural outlook is buoyant and positive for food prices.
“The signal that RBI is warming up or getting more comfortable towards accommodation is the point around transmission to credit markets being satisfactory. However, at the juncture of elevated global volatility perhaps RBI does not believe it to be opportune to cut rates. They will await more certainty from external side (US elections, Middle East tensions), before taking their first step which is not likely before March of 2025. Why disturb the horse which is well tethered?,” said Anitha Rangan, Economist, Equirus.
