Possibilities of rate-cut look unlikely before next August

If you are looking for a rate-cut in the near future, then you need to hold your breath as there is no likelihood of any rate cut until next August. The RBI policy, which has a hawkish pause with dovish undertone, does not have any surprise on the repo rate or stance. However, there is a major revision when it comes to GDP forecasts for the year to seven per cent, which is predicated by a good third and fourth quarter that go with revival in consumption demand. This is significant because we were getting contrary signals from the market on rural demand. The RBI’s forecast of inflation for the quarters of next year are important as the number goes less than five per cent only in Q2, which means that given the importance placed by Monetary Policy Committee (MPC) on inflation, it looks unlikely that there can be a rate cut before August. The RBI Governor has upgraded FY24 growth to seven per cent after undershooting 1H, now forecasts 6.3 per cent growth in 2H. A study by Bank of Baroda research team sees growth easing to six per cent comfortably in 2H and see FY24 at 6.6 per cent.

The RBI’s FY25 GDP forecast for first three quarters looks healthy as well. On inflation, despite risks on account of patchy perishables, the MPC outlook is unchanged as it is insisting on keeping an eye on inflation and financial stability risk and active liquidity management. The MPC continues to stress that the policy stance has to stay actively disinflationary, while supporting growth. An Emkay report maintains the RBI will stay vigilant and it is unlikely to precede the Fed in any policy reversal in CY24. The RBI governor, a YES Bank analysis goes on, has warned that the central bank is unlikely to lower its guard on inflation and one or two months of positive data on inflation does not, therefore, allow them to change the course of the monetary policy. The problem for RBI is that inflation refuses to come down towards the four per cent target and the earliest that it may do so by its own projections is in Q2 of the next financial year.

Thus, it may be safe to say, and keeping in mind the credibility of the central banker, there is unlikely to be any chance of a rate cut till that time, unless of course something dramatically changes and brings about a turnaround. To sum it up, the MPC decision signals a cautious balancing of the need to control inflation while fostering economic growth and the possibility of future rate cuts depends on the evolution of key macroeconomic indicators, particularly inflation since RBI’s focus may be to bring inflation closer to its target of four per cent before any further action. Given the fact that India’s growth is pretty robust with inflation also under control, the RBI is likely to be on long pause.