3 key reasons why RBI will not cut rates this year: Elara Capital

Firming commodity prices, rising US dollar, and geopolitical tensions may delay RBI rate cuts. Elara Capital expects no rate cut until Q4FY25 due to global factors and sticky food inflation in India.

Nishant Kumar
Updated1 May 2024
Elara Capital believes the RBI's MPC will hold the policy repo rate through 2024 (CY24).  (REUTERS)
Elara Capital believes the RBI’s MPC will hold the policy repo rate through 2024 (CY24). (REUTERS)(Reuters)

A confluence of factors, including the firming up of commodity prices globally, rising US dollar and bond yields, geopolitical tensions, sticky food inflation and a healthy growth outlook of India will likely delay the rate cut moves of the Reserve Bank of India.

According to brokerage firm Elara Capital, the RBI's MPC (Monetary Policy Committee) will hold the policy repo rate through the calendar year 2024 (CY24). The brokerage firm expects the first rate cut only by the fourth quarter of the financial year 2025 (Q4FY25) against the prior expectation of a rate cut in Q3FY25.

The brokerage firm pointed out that the "repricing of US inflation risks to the upside and growing uncertainties over the Fed’s policy course have firmed up the US dollar and US treasury yields, adding challenges to the entire emerging market space, including India".

"Recent geopolitical developments and positive macroeconomic data from China have led to the firming up of commodity prices. On the domestic front, a healthy growth outlook and risks of sticky food inflation due to inclement weather conditions remain key risks. In this backdrop, we expect the MPC to hold policy repo rate through CY24 –expect the first rate cut only by Q4FY25 versus the prior expectation of Q3FY25," said Elara.

According to Elara Capital, three key factors may delay the RBI rate cut. Take a look:

The Fed factor

Elara believes if the US Fed begins rate reduction in the third quarter of the current calendar year, it will also get the policy space to start its cutting cycle.

On the other hand, if the Fed holds rates this year, it will cause more upside in the US dollar. This can prompt the MPC to hold rates too.

The RBI, as per the brokerage firm, may lean towards a real policy rate at 1.5-2 per cent with growth staying robust.

The expectations of Fed rate cuts have waned significantly from six to seven rate cuts expected at the start of 2024 to the expectations of one to two rate cuts now.

"We feel the Fed’s reaction function warrants a ‘wait and watch’ approach. While the potential for inflation going down to 2 per cent does not exist, a near about 2.6 per cent inflation (core PCE), 4 per cent unemployment rate and less than 2 per cent growth can lead the Fed to cut by at least 50bps this CY24E, starting in Q3CY24," Elara said.

Also Read: US Fed decision today: 5 key factors that will shape Fed's policy decision

The risk of commodity price rise

A sustained revival of the Chinese economy and escalating geopolitical tensions can trigger a sharp upside in commodity prices, which will be a severe blow to the efforts to curb inflation.

Elara sees geopolitical events as transitory unless Israel and Iran embark on retaliatory actions.

Also Read: India’s political economy: Higher-for-longer policy rates pose peculiar problem

The brokerage firm said that the upside impact on industrial metals needs attention even though the possibility of this price rise to push India’s CPI is muted due to the composition of the CPI basket and the limited possibility of a hike in fuel prices in the election season.

Robust growth, sticky food inflation

"With India’s GDP growth projected at a robust 7 per cent for FY25E, the RBI has enough policy room to hold rates at 6.5 per cent, said Elara.

Also Read: Deloitte revises India's FY24 growth forecast to 7.6%-7.8%

Sticky food inflation is another factor which can keep the RBI away from rate cuts.

"On the food inflation front, we expect rising temperatures across the Indian peninsula to keep food inflation sticky. While the forecast of normal monsoons is likely to keep the RBI in the comfort zone, the spatial inter-temporal distribution of monsoons has been a risk," said Elara.

Elara believes in the first half of FY25, RBI MPC may stay focused on global developments rather than domestic factors unless any adverse growth shocks emerge. Elara said that the possibility of adverse growth shocks is low at present.

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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HomeEconomy3 key reasons why RBI will not cut rates this year: Elara Capital

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