RBI rate cut expected in October; Crisil anticipates two rate cuts this fiscal

The Reserve Bank of India (RBI) is likely to start cutting the key benchmark interest rates in October as better monsoons and high crop sowing compared to last year are expected to ease food inflation, according to a Crisil Research report released on August 8. The ratings agency also expects the Indian central bank to cut the interest rates twice in the financial year 2024-25.

“We see the RBI cutting rates starting October 2024 at the earliest, and expect a total of two rate cuts this fiscal,” said the rating agency in its report titled - Eyes Peeled on Prices.

The rating agency also highlighted key areas of concern, such as high food prices, which is the “biggest hurdle” for RBI shifting its current stance.

“Food inflation has been persistently high for over a year now, and the RBI remains cautious of its direct and indirect impact on disinflation process,” said Crisil.

The consumer Price Index (CPI) inflation rate rose to 5.1 per cent in June from 4.8 per cent in May; this was fueled primarily by the hike in food inflation figures.

Reserve Bank of India Governor Shaktikanta Das kept the key benchmark interest rate or the repo rate unchanged at 6.5 per cent at the bi-monthly Monetary Policy announcement on August 8. The real gross domestic product (GDP) growth forecast was at 7.2 per cent for the financial year 2024-25.

RBI's stance to keep interest rates unchanged comes at a time that is in contrast with what the major global central banks are doing. The European Central Bank (ECB) and Bank of England (BOE) have started cutting their interest rates. The Bank of Japan (BOJ) has increased their interest rates, and the US Federal Reserve (FED) is expected to cut rates in September, as per the report.

Crisil anticipates the economic environment in India to change in favour of a rate cut. “We expect the macroeconomic environment to gradually turn favourable for a rate cut,” said the rating agency.

The core inflation rates may see an upside in the coming months driven by the increasing freight costs, high geopolitical risks related to crude oil prices, and hike in rates of telecom tariffs, “uptick is expected to be mild,” said the report.

India's economic growth is expected to ease with lower fiscal support as the government focuses on consolidation, according to the report.