RBI Policy: Rate cut unlikely in August, may begin in Q4FY25, says Infomerics Ratings

As India continues to solidify its status as a "bright spot" in the global economy, maintaining a trajectory of high growth and relatively controlled inflation, the August 2024 deliberations of the Monetary Policy Committee (MPC) are particularly important. Two key issues frequently discussed leading up to the policy announcement are the RBI's stance and any potential changes to the benchmark interest rates.

Most experts expect the RBI Monetary Policy Committee (MPC) to keep interest rates unchanged for the ninth consecutive time and maintain its stance of ‘withdrawal of accommodation.’

"Despite steady growth of 7-8 percent in Asia's third-largest economy, the inflation outlook remains concerning. Inflation breached the 5 percent mark in June 2024, and food inflation remains persistently high despite a continuous decline in core inflation. Given the heightened geopolitical dynamics, geoeconomic fragmentation, and the RBI's mandate for monetary stability—characterized by moderate and stable inflation—there is a compelling need for caution and vigilance on inflation," said Manoranjan Sharma, Chief Economist at Infomerics Ratings. In other words, “If it ain’t broke, don’t fix it.”

Sharma further pointed out that the US Fed’s actions at the September meeting could influence the direction of India's monetary policy. A rate cut by the US Fed is anticipated, and this move by the "Big Daddy" could have spillover effects across global markets, potentially encouraging central banks to adopt a less restrictive policy. The US Fed's policy decisions could have a delayed impact on the direction, pace, and sequencing of monetary policy events in India.

Given this overarching macroeconomic landscape, Sharma expects the RBI to initiate a rate cut in Q4 of FY25.

"The monetary policy debate in India is often framed around a trade-off between growth and inflation, depending on the unique circumstances at various times. Ultimately, both monetary and fiscal policy need to work in tandem to trigger a virtuous cycle of high growth and low inflation. Achieving this balance is still a challenge and will require concerted effort," noted Sharma.

Meanwhile, Emkay Global also expects no rate changes in the upcoming RBI MPC decision but emphasises the importance of timing policy pivots and managing liquidity. It believes RBI is unlikely to precede US Fed in cutting rates, however, anticipates a softer policy tone due to market risks. Persistent food inflation and below-par growth have been noted, with a minor adjustment in policy stance seen as a potential move to facilitate future rate cuts. It expects rate cuts to begin before 2024-end if global situation worsens.

"Even as domestic dynamics have changed a little from expected lines, there is a lot to digest for the MPC, as it meets this week. While the global Goldilocks narrative suddenly moves to that of a growth scare and deep Fed cuts, massive volatility in global risk assets led by unwinding of the Yen carry trade, risks spillover to domestic financial stability as well. The fluidity of global narratives and policy repricing, in conjunction with surplus banking liquidity, noisy food inflation back home, and a still-elusive 4% inflation target, make it tricky for the RBI to find a balance in its policy biases," said the brokerage.

It added that staying relatively hawkish will only create an unwanted INR carry, and increase the problem of plenty for the RBI.

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