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Business News/ Economy / RBI Policy: Economists expect a shallow rate cut cycle to begin in H2FY25

RBI Policy: Economists expect a shallow rate cut cycle to begin in H2FY25

  • Economists believe that the RBI now seems to remain more confident of growth conditions than that with inflation trajectory. However, they expect a shallow rate cut cycle to begin only in the second half of FY25.

RBI projected India’s real GDP growth rate for FY25 at 7%. CPI inflation for FY25 is estimated at 4.5%.

RBI Monetary Policy: The Reserve Bank of India (RBI) on Friday decided to maintain the status quo on policy rates, in line with expectations. In its first bi-monthly policy meeting for FY25, the RBI's Monetary Policy Committee (MPC) headed by Governor Shaktikanta Das left the key repo rate unchanged at 6.5% and maintained the stance at ‘withdrawal of accommodation’.

The RBI projected India’s real GDP growth rate for FY25 at 7%. CPI inflation for FY25 is estimated at 4.5%.

“Robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4.0 per cent. As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation," RBI Governor said in his monetary policy statement.

Read RBI Monetary Policy 2024 LIVE Updates here

Under these circumstances, monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions, he added.

Economists believe that the RBI now seems to remain more confident of growth conditions than that with inflation trajectory. However, they expect a shallow rate cut cycle to begin only in the second half of FY25.

“With an unchanged inflation projection for FY25 at 4.5%, with growth conditions improving and with the US Federal Reserve also pushing out its rate cut cycle, we think that the RBI might only be in a position to cut rates either in the August policy or even later. While one can remain confused on the timing of the cut, the confidence is on the fact that the rate cutting cycle in India will be shallow in FY25," said Indranil Pan, Chief Economist at Yes Bank.

Also Read: RBI monetary policy: Rates remain unchanged, growth outlook bright; 5 key highlights of RBI MPC outcome

Madhavi Arora, Lead Economist, Emkay Global Financial Services has long maintained that the RBI policy has been somewhat pegged to the Fed, specifically over the last two years, even as it formally targeted inflation.

“This seems fair, as external dynamics have been fluid, implying that the policy prerogative needs to be flexible for ensuring financial stability. The fluidity of global narratives and policy repricing, in conjunction with the near-term problem-of-plenty on INR/bonds, could make it arduous for the RBI to find a balance in its policy biases," said Arora.

She maintains that the RBI’s tone will slowly tiptoe to ‘Gracklish’ from the usual ‘Hawk-Dove’ signaling, implying a non-committal stance and limited definite forward guidance ahead.

While bull-steepening of India bonds looks to be a popular trade, the consistent repricing of Fed cuts could spill over into the RBI’s reaction function and will be cyclically noisy for bonds/FX, Arora added.

Also Read: RBI monetary policy 2024: Central bank keeps real GDP growth projection at 7% for FY25

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities expects a shallow rate cut cycle from Q3FY25 onwards. He believes the RBI does not seem to be too worried about the liquidity situation and expects the central bank to continue to focus on fine-tuning of liquidity conditions through VRR/VRRR auctions, in order to align the overnight rates with the repo rate.

“The RBI has enough space for holding repo rate steady, with its FY2025 GDP growth being quite strong at 7% in order to target the 4% inflation mark. We continue to expect a shallow rate cut cycle from Q3FY25 onwards with the stance changing to neutral in the end-Q2FY25 or along with the rate action," Rakshit said.

Mirroring similar views, Anitha Rangan, Economist, Equirus expects RBI to continue with the current tools of VRR and VRRR to manage deficit and surplus in the system.

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