RBI may take a cue from US Fed, but likely to slash rates in February 2025 only: SBI Research report

Following the recent 50 basis points (bps) rate reduction by the US Federal Reserve, India's central bank might contemplate a similar move, but not until next year. A new report from SBI Research suggested the Reserve Bank of India (RBI) could potentially announce a rate cut by February 2025, ANI reported.

The report points to India's consumer price index (CPI) inflation, which dropped to a near five-year low of 3.65 per cent year-on-year in August 2024. Despite this positive trend, the report advises against expecting immediate action from the RBI.

"As such, we don't anticipate any rate action by RBI in calendar 2024. An early 2025 rate cut (February) looks like the best bet as of now. We still believe that liquidity challenges will remain for the banking sector with government cash balances progressively moving out of the banking system," the report stated, according to the ANI report.

Inflation fears

While inflation spikes are anticipated in September and October, the report projects that CPI inflation will largely remain below or near 5 per cent in the coming months. For the 2024-25 financial year, average inflation is expected to fall within the 4.6 to 4.7 per cent range, comfortably within the RBI's target of 4-6 per cent, as per the report.

The report also highlighted positive monsoon activity, with a 7 per cent surplus recorded to date. This has had a beneficial impact on Kharif sowing, which has exceeded the five-year average, reaching 109.7 million hectares. As of September 17, Kharif crop sowing was 0.1 per cent higher than typical acreage and 2.2 per cent above last year's levels. Paddy sowing increased by 2.1 per cent, covering 41 million hectares compared to the five-year average, the report added.

Regarding monetary policy, the report notes that the RBI has maintained tight liquidity to manage inflationary pressures. Government surplus cash balances averaged ₹2.8 lakh crore, while the durable/core liquidity surplus rose to ₹3.19 lakh crore as of September 18.