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RBI policy meet starts tomorrow: The Reserve Bank of India (RBI) might only consider cutting rates in the third quarter of fiscal year 2025 (Q3FY25), as historical trends suggest that interest rates in emerging economies change with a lag of two months in response to rate changes in developed economies like the US and the UK, according to a report by SBI Research.
SBI believes the RBI will maintain the policy stance as 'withdrawal of accommodation' and the first rate cut will occur in Q3FY25. Moreover, the rate-cut cycle could be shallow.
However, SBI Research underscored that India is a "notable exception to strong evidence of emerging economy central bank rate actions being predicated by advanced economy central bank rate actions".
"We believe the stance should continue to be withdrawal of accommodation. Strong evidence of emerging economy central bank rate actions is predicated by advanced economy central bank rate action. India is an exception. The first RBI cut is possible in Q3FY25. Rate cut cycle likely to be shallow," said SBI.
The Monetary Policy Committee (MPC) of the RBI will convene for a three-day meeting starting on April 3 and concluding on April 5.
SBI believes the pivot on rate cuts can be a long and enduring journey for markets.
"Federal Reserve chair Powell put some ice on the broader market’s hopes of an early pivot by decisively speaking that the Fed would like to see more progress on the price front despite a favourable PCE reading. PCE, which strips volatile food and energy prices, rose 0.3 per cent in February, after rising 0.5 per cent in January, marking its biggest back-to-back gain in a year time," SBI observed.
The bank said domestic inflation is currently being driven by food price dynamics as fuel prices remain moderate. The trend is likely to continue and evolving food prices may continue determining domestic inflation.
CPI inflation is expected to remain slightly above 5 per cent in the remaining month of FY24. Core CPI declined to 3.37 per cent - a 52-month low, SBI underscored.
Also Read: RBI likely to keep interest rates unchanged in upcoming April, June policy meetings: Report
"Inflation is expected to decline till Jul’24 but increase thereafter to reach a peak of 5.4 per cent in Sep’24, followed by a deceleration. For the whole FY25, CPI inflation is likely to average 4.5 per cent against 5.4 per cent in FY24," said SBI.
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