RBI likely to cut interest rates in 2024, but the wait just got longer

If you were hoping that your interest rates on home loans would start coming down soon, then your wait just got longer. The Reserve Bank of India's monetary policy committee left the repo rate unchanged at 6.50 per cent for the sixth consecutive time. The RBI highlighted strong economic growth, but more importantly uncertainty on how food inflation pans out, in its monetary policy statement.

The general expectation around the world is that with inflation cooling from last year's peak, major central banks will start cutting interest rates sometime this year and boost economic growth.

The Reserve Bank too is expected to follow in the footsteps of other central banks like the US Federal Reserve and cut its benchmark repo rate. But, that it is still several months away at least, and volatile food prices remain a near-term concern.

"The inflation trajectory, going forward, would be shaped by the outlook on food inflation, about which there is considerable uncertainty," RBI Governor Shaktikanta Das said announcing the MPC decisions.

CPI (consumer price index) inflation in December touched 5.7 per cent. Das noted that monetary policy must continue to be actively disinflationary to align inflation to the target of 4 per cent on a durable basis. He also pointed out that transmission of the 250 basis points repo rate hike RBI had done in the past remained incomplete and therefore the stance also remained unchanged at "withdrawal of accommodation."

As per RBI's projections, retail inflation in the current January-March quarter is likely to be at 5.0 per cent. It is expected to stay at 5.0 per cent in the April-June quarter and then fall to 4.0 per cent in the September quarter, before rising again to 4.6 per cent and 4.7 per cent in the third and fourth quarters of 2024-25.

"Based on quarterly projections of inflation for next year, we believe that a rate cut is possible only in Q2 FY2025 when the forecast of inflation is 4 per cent. However, it is expected to increase in Q3 and Q4 to above 4.5 per cent and hence there will be a nuanced approach by the RBI," said Madan Sabnavis, chief economist at Bank of Baroda.

The sense is that the RBI will have to be convinced that inflation is stable and on the downward path before it embarks on either changing the stance or the repo rate, he added.

"The RBI left little room for any imminent policy pivot and therefore we do not expect rate cuts to happen before the August 2024 policy," said Abheek Barua, chief economist and executive vice-president at HDFC Bank.

Anurag Mittal, head of fixed income at UTI Asset Management, said the RBI appropriately maintained the monetary policy discipline and assertively indicated its preferences to remain on hold till they get more confidence on sustainably reaching their inflation target.

He still expects the central bank to cut interest rates by 50-75 basis points in 2024.

Siddhartha Sanyal, chief economist and head of research at Bandhan Bank, doesn't expect the repo rate to be lowered "quickly" as he feels that the legroom from the current 6.50 per cent is limited.

A "prudent" central bank will likely refrain from a rate cut around a major political event like the general election, he said, adding that the Indian rate-cutting cycle might be a "shallow" one.

"If the RBI's CPI forecasts come true, clarity about headline CPI inflation softening to a 4 per cent handle should emerge by Q2 of 2024-25; that should offer the MPC the flexibility to cut the repo rate and maintain a real interest rate that is better aligned with their long-term policy objective," said Sanyal.

Thursday's pause means the MPC didn't change its key rate at which it lends money to commercial banks throughout the financial year 2023-24, neither did it change the stance. Instead, as Dharmakirti Joshi, chief economist at ratings agency CRISIL, noted, liquidity management has been the preferred method of RBI to push up market rates.

"While fiscal prudence has smoothened the path for monetary policy, the RBI is wary of cutting rates or changing stance too soon given inflation is not fully tamed yet," he said.

Joshi said given the tensions around Red Sea and its attendant impact, and given the trajectory of food prices, the RBI MPC is unlikely to cut rates in the April policy meeting too. Any rate cut would "most probably" come in June, if not later, he added.

RBI's 7 per cent GDP growth forecast for 2024-25 reflects there are minimal concerns on the economic growth at this point, said Suman Chowdhury, chief economist and head of research at Acuite Ratings and Research. There are also "significant" upside risks for the 4.5 per cent inflation forecast for the next financial year if the economic growth maintains a high level of momentum and if there are even moderate risks in the monsoon behaviour, he added.

"Given the tone of the MPC statement and the expectation of growth buoyancy, we believe that the likelihood of any rate cut by RBI has significantly reduced over the next six months," said Chowdhury.

He expects short-term rates to continue to remain high in the near term and deposit rates to go up 25-50 basis points, given the continuing gap between credit and deposit growth.