RBI Maintains Rate: Economists Anticipate Rate Cut In December Amid Economic Risks

India's Monetary Policy Committee, led by RBI Governor Shaktikanta Das, has maintained the benchmark repo rate at 6.5% for the tenth consecutive meeting while shifting its stance to neutral. This change signals potential room for future rate cuts, according to economists Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank and Anubhuti Sahay, Head, South Asia Economics Research, Standard Chartered Bank

Barua noted that the shift in stance creates a foundation for possible rate cuts, emphasising the importance of domestic conditions in the RBI's decision making. He highlighted various risks, including fluctuating metal and fuel prices, and geopolitical uncertainties, particularly concerning developments in the Middle East and China. "What the message was that there are a number of risks on the horizon particularly from metal prices, fuel prices, we still do not know how middle East and China will play out." he said.

Barua suggested that if conditions remain stable, December could be a viable time for a rate cut.

Sahay shared a slightly more cautious perspective, projecting India's GDP growth at 6.9%, little lower than the RBI's estimate of 7.2%. She indicated that while government capital expenditure and a revival in rural demand might drive growth in the second half of the fiscal year, market expectations could see a downward adjustment to a growth trajectory closer to 6.5% to 7%. She also stated, "But it will be a far more inclusive growth and in terms of GVA the numbers won't be very different from last year."

She described the policy's undertone as dovish and mentioned that a rate cut might also occur in December.

It is obvious that high food inflation is constraining Mint Road. To be sure, non-food inflation stayed significantly below trend at 2.3% in the first five months of the current fiscal, said Dharmakirti Joshi, Chief Economist, CRISIL.

He further added that, the outsized US Federal Reserve rate cut of 50 basis points in September marked complete and a decisive turn in monetary policy among major central banks. Yet, for emerging market peers, domestic inflation concerns are at the front and centre.

"We anticipate a 25-basis-point reduction in the repo rate during the MPC’s policy review meeting in December, in response to the expectation that food inflation will decline. We also expect GDP growth to moderate to 6.8% this fiscal compared with 7.2% forecasted by RBI for this year," he said.

All three economists acknowledged the potential for a modest rate cut, depending on external factors. Barua stressed that inflation appears to be under control, but geopolitical risks could complicate the scenario.

On cautions expected in regards to NBFCs in the meet, Sahay pointed to the RBI's vigilant stance regarding unsecured loans, which have seen double-digit growth. She said that easing interest rates could reignite risks in the financial sector if not managed carefully.