RBI MPC Meet: Why Analysts Expect Rate Cuts In October

Analysts expect the Reserve Bank of India to cut rates earlier than anticipated after the central bank retained the repo rate for the ninth time on Thursday.

Governor Shaktikanta Das announced the repo rate was maintained at 6.5%, with a 4:2 majority, during the Monetary Policy speech. He continued to remain cautious on inflation amid elevated food inflation.

Several brokerages had anticipated the central bank to cut rates in February 2025. However, now CLSA, JPMorgan and HSBC expect it to happen in October. HSBC expects two consecutive rate cuts of 25 basis points each—one in October quarter and another in January quarter of FY25.

These factors could affect the decision to cut rates, according to the brokerages.

The real GDP growth for the first quarter was revised down from 7.4% to 7.1%, while the CPI inflation forecast for the second quarter was revised from 3.8% earlier to 4.4%, largely due to higher food inflation. While the FY25 growth forecast was unchanged at 4.5%.

Food inflation has been the key driver of the topline over the last 12 months, Das had mentioned. However, CLSA expects this trend will not continue in July and August 2024 because of higher base effect in July last year and probability of a good monsoon.

Food prices are already moderating on the back of good monsoon said JPMorgan. The brokerage expects the July CPI to average below 4%, which is below the targeted range of the RBI.

If the current environment sustains, HSBC expects food inflation to fall quickly, leading to room for easing monetary policy. It expects a 50 basis points cuts over October 2024 and January 2025 quarters.

JPMorgan attributed the slower GDP growth rate to weak corporate earnings and other high frequency data, such as government expenditure and core industries output coming lower than expected

While the US unemployment data came in at a three-year high at 4.1%, it is in inconclusive and too early to judge a possible recession in the US economy, according to Das.

However, according to CLSA, unemployment data and the Bank of Japan hiking the interest rates has sparked recessionary fears. The brokerage increased the US Fed rate cut expectations to 100-125 basis points, from 50-75 basis points earlier.

The MPC maintained its stance on policy rates and withdrawal of liquidity. The current banking liquidity is in surplus of Rs 2 trillion and RBI is absorbing this by reverse repo, according to Jefferies.

The banks' deposit growth of 12% still lags the loan growth of 15% and this has to be watched out for as this could lead to asset-liability mismatch down the line, it said.

Either the deposit growth should rise or the credit growth should subside to avoid turbulence, according to HSBC.