When 2024 began, the broader expectation was that major central banks would start cutting interest rates as inflation that had surged post-COVID cooled. Switzerland's Swiss National Bank set the ball rolling by cutting its interest rate back in March. Sweden's Riksbank cut rates in May and this week, the European Central Bank (ECB) and Bank of Canada (BOC) reduced their interest rates too.
The Reserve Bank of India on Friday kept its repo rate on hold at 6.5 per cent for the eighth consecutive time, even as voices within the monetary policy committee in favour of rate cuts are now growing. Two members this time around batted for a rate cut as well as a change in stance to neutral.
Despite the growing voices, economists expect the first rate cuts by the RBI perhaps only in the October-December quarter.
Inflation in India has cooled in the last few months, but RBI Governor Shaktikanta Das continues to stress the need for inflation to decline to 4 per cent and stay there on a durable basis. As per RBI's own projections, the CPI (consumer price index) inflation is expected to touch 3.8 per cent in the July-September quarter, but then rise again to 4.6 per cent in the December quarter. Also, food inflation has been a worry and will have to be watched out for. The expectation is that monsoon rain this year will be good and that should help.
With India's economy on a strong wicket; GDP grew at 8.2 per cent in 2023-24, and RBI expects it to grow 7.2 per cent this year, the central bank has, as Das put it, "elbow room to pursue price stability."
And Das will certainly not be swayed by actions global central banks take.
"While we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions," he said.
Simply put, the MPC's actions will be primarily determined by domestic growth-inflation conditions and the outlook.
Kotak Institutional Equities' senior economist Suvodeep Rakshit says the domestic growth dynamics will remain conducive for the RBI to be on a pause, at least in the August policy as it remains focused on guiding inflation towards the 4 per cent target on a durable basis. Additionally, an asynchronous monetary policy cycle globally (the Federal Reserve is yet to cut rates while the ECB and BOC have) will encourage the RBI to wait and watch, he says.
"The chance of a rate cut cycle starting with the October policy will be high if the global growth metrics, especially in the US, deteriorate faster than expected, in addition to a Fed rate cut cycle starting in July/September. However, given our expectations of domestic and global economic conditions, we continue to expect a shallow rate cut cycle (75-100 basis points) from the December policy, with the stance changing either in the October policy or along with the rate action," said Rakshit.
Soumya Kanti Ghosh, group chief economic adviser at State Bank of India also expects the RBI to start cutting rates only in October.
"The June monetary policy was a mixed bag as it happened in the midst of a political transition. While the direction of the policy is more or less decided, RBI has adopted a more cautious stance to observe new government moves," he said.
Mahendra Kumar Jajoo, CIO - Fixed Income, Mirae Asset Investment Managers (India) says given the cushion of strong growth momentum, volatile food prices and ongoing geopolitical uncertainties, there may be no rush for a rate cut even as two major central banks have already cut rates this week.
"If domestic drivers like good monsoons help lower food prices, the RBI would be open to cutting rates before the Fed. But for that, we think the RBI will have to clearly see its modelled one-year-ahead inflation forecast asymptote to 4 per cent," felt Pranjul Bhandari, chief economist, India and Indonesia at HSBC.
Bhandari currently has pencilled in a rate cut of 25 basis points in August but says risks are for it to be pushed to October. She is expecting a 50 bps rate cut overall in this cycle, with the repo rate touching 6 per cent by March 2025.
Santanu Sengupta, chief India economist at Goldman Sachs says strong domestic growth, along with a sticky trajectory for food inflation has meant the RBI MPC members may be reluctant to quickly pivot towards monetary policy easing.
He also expects a "shallow" easing cycle, with a 25 basis points rate reduction in the December quarter, followed by another 25 basis points reduction in the March quarter. The first cut will most likely be in the December MPC meeting, he said.