Crypto Market: When Will RBI Cut Repo Rate And Why Does It Matter For Investment In Cryptocurrency?

While RBI has maintaind status quo for the past four monetary policies in a row for FY24 due to elevated risks in the CPI figures going forward, however, the latest inflation data brings in the hope of a rate cut sooner than expected.

Although, the rate cut prospects is taken up for debate even when CPI numbers have come below RBI's tolerance limit of 6% for the first time in three months in September 2023. Just like every other market instruments, cryptocurrency exchanges also expect a rate cut from RBI but not until Q1 of FY25. Wondering, how repo rate is related to ballooning crypto market? Well, RBI's policy makes quite a difference in the cryptocurrencies investment.

In September 2023, India's consumer price index (CPI) inflation has eased once gain higher than markets expectations in September to 5.02% compared to 6.83% print in August 2023. That being said, the country's retail inflaton has dropped below RBI's tolerance limit of 6% for the first time in three months. The September data was broadly owing to a sharp decline in food inflation which came in at 6.56% in September 2023 versus 9.94% in the previous month.

RBI's medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of plus or minus 2 per cent, while supporting growth. Hence, the upper tolerance limit for inflation is 6% by RBI.

After the October 2023 policy, Sathvik Vishwanath, Co-Founder & CEO, Unocoin said, "The Reserve Bank of India (RBI) could consider cutting its key interest rate by 50 basis points (bps), effectively bringing the repo rate down to 6 percent by June 2024."

In his view, Vishwanath said, "this outlook appears cautious, suggesting that the RBI may be preparing for an extended phase of monetary policy stability and tighter financial conditions. It is expected that the first rate cut could not happen until June 2024, and even then it would likely be a modest move. The forecast calls for a gradual and shallow cycle of rate cuts with a total cut of only 50 bps."

According to the Unocoin founder, this perspective suggests that the RBI could adopt a cautious and conservative approach to strike a balance between stimulating economic growth and maintaining financial stability. It appears that the central bank intends to proceed with caution and make moderate and prudent interest rate adjustments.

How does RBI's repo rate especially a rate cut could boost cryptocurrency market?

The analysis suggests that the RBI is likely to take a measured and calculated approach to monetary policy. This entails a limited rate cut over the horizon with a target of a repo rate of 6 percent by mid-2024, Vishwanath said. He added, "This aspect is very important for investors, businesses and financial markets as they navigate the evolving economic environment in India."

"A potential 50 basis points (bps) rate cut by the RBI could impact cryptocurrencies. Lower rates may attract investors seeking higher returns, potentially boosting crypto prices. However, if the RBI's caution signals economic concerns, it might lead to risk aversion and regulatory tightening, affecting crypto markets. Vigilance is essential for crypto participants," Vishwanath finally concluded.

During the October 2023 policy, RBI said, the near-term inflation outlook is expected to improve on the back of vegetable price correction and the recent reduction in LPG prices. RBI added the future trajectory will be conditioned by several factors like lower area sown under pulses, dip in reservoir levels, El Niño conditions and volatile global energy and food prices. According to the Reserve Bank's enterprise surveys, manufacturing firms expect higher input cost pressures but marginally lower growth in selling prices in Q3 compared to the previous quarter. Services and infrastructure firms expect a moderation in the growth of input costs and selling prices.

Taking into account these factors, RBI predicts CPI inflation at 5.4% for FY24 --- with Q2 inflation at 6.4%, Q3 rate at 5.6%, and Q4 estimated at 5.2%. RBI had factored CPI to be around 5.2% in the first quarter of FY25.

RBI's stance in December 2023 policy will be keenly watched especially after the September inflation print which comes as a relief sign. However, there is one more inflation data of October 2023 which will be announced in November month, which will give a much broader clarity on rate cuts ahead and RBI's forthcoming policy outcomes.

RBI holds key repo rate at 6.5% since April 2023 policy till date in FY24. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Earlier, in an interview with GoodReturns, Vishwanath said, in 2023, the cryptocurrency market will be heavily influenced by key trends. Decentralized finance (DeFi) continues to gain momentum, offering innovative financial services without intermediaries. Non-fungible tokens (NFTs) remain popular for unique digital assets. Sustainability concerns drive a shift towards eco-friendly mining practices. The market also sees increased attention from regulators, with legal frameworks taking shape. These factors, coupled with growing mainstream adoption, shape the dynamic landscape of the cryptocurrency market in 2023.