Experts See More Rate Cuts On Horizon

The cut in repo rate and the commentary does indicate that MPC could be looking more at the inflation-growth dynamics instead of only inflation which was the earlier perception. Therefore, we could expect more rate cuts based on economic data - Madan Sabnavis, Chief Economist, Bank of Baroda, tells Bizz Buzz

Mumbai: As expected, Reserve Bank of India (RBI) has cut the benchmark rate by 25 basis points for the first time after FY20, while maintaining a neutral stance. Experts see more such rate cuts in future. The central bank has set an inflation target of 4.8 per cent.

However, there has been no change in stance or any other provision of liquidity support.

Talking to Bizz Buzz, Madan Sabnavis, Chief Economist at Bank of Baroda, said: “The cut in repo rate and the commentary does indicate that the MPC could be looking more at the inflation-growth dynamics instead of only inflation which was the earlier perception. Therefore, we could expect more rate cuts based on economic data.”

Analysts do think the GDP forecast made for next year at 6.7 per cent is very much doable. Inflation at 4.2 per cent will be contingent on both a good monsoon and limited impact of imported inflation. There could be an upside here, given global uncertainty which needs to be watched. The RBI has also clearly stated to the market that it is not targeting an exchange rate and will also ensure orderly liquidity in the market, he said.

Rajeev Radhakrishnan, CIO (Fixed Income), SBI Mutual Fund, said: “While the rate cut was clearly subjective, the lack of specifics on liquidity could potentially impeded transmission.”

While yields have moved up a bit, it is anticipated that the RBI would continue to ensure targeted infusion of liquidity over the coming months that should enable yields to stay anchored. Overall, the weaker than anticipated growth over the previous year and projection on CPI for FY26 closer to the target has provided confidence to the RBI to ease rates, he said.

The decision to cut the rate came from the RBI after nearly five years. While delivering the rate cut, the MPC highlighted that its policy stance will continue to remain neutral. The Standing Deposit Facility (SDF) rate was also reduced by 25 bps to 6 per cent from 6.25 per cent.

Given that headline inflation is gradually moving towards the RBI’s target range, with easing pressure from food prices, the RBI projected headline inflation for FY25 at 4.8 per cent, while the projection for FY26 remains unchanged at 4.2 per cent.

Binod Kumar, MD & CEO of Indian Bank says: “The RBI’s decision to deliver the anticipated 25 basis point rate cut is a welcome move, aligning with market expectations. Maintaining a neutral stance is also in line with the expectations.”

The MPC’s focus on liquidity is a good and heartening thing, reflecting the government and RBI’s concern in this area. Given the government’s initiatives during the budget and the anticipated increase in household expenditure, we foresee optimistic GDP growth, experts added.