GoodReturns Poll: Timing Is Key! RBI Likely To Cut Repo Rate By 25 Bps But Not On December 6, When?

The Reserve Bank of India (RBI) is likely to keep repo rate unchanged for the eleventh time in a row. The reason by a group of economists is attributed to be the sharp surge in the CPI inflation rate, and the slowest growth in the economy in two years. Further, RBI is predicted to hike its inflation target and lower GDP forecast for upcoming quarter, as per a poll of 30 economists conducted by GoodReturns.In. The easing cycle in key interest rates is estimated to begin from February 2025 policy, which will be the first RBI rate cut in 2 years.

Madan Sabnavis, Chief Economist, Bank of Baroda said, "The uncertain global environment and recent inflation trends (averaging 5.9% in the last two months) suggest that the RBI is likely to maintain the current repo rate."

Among key changes expected on Friday, in the poll, 6 economists believe that RBI will raise its CPI inflation and trim its GDP target for Q3FY25.

Bank of Baroda economist said, "There could be a change in RBI projections for both inflation and GDP as inflation has been higher so far than the RBI forecast for Q3 and GDP growth is expected to be lower in Q2. It would hence be of interest to see what the projections this time are. While liquidity is tight presently, any measure to augment the same will be indicative of the RBI view on the permanency of this situation."

Explaining further in the poll, Emkay Global Financial believes that the timing and window of the rate cut is tricky.

"Even as the RBI's growth/inflation forecast will see significant downward/upward revisions, an immediate rate cut may not be easy for the MPC to justify, especially as their commentary has been assertive on durable disinflation being the primary mandate. Nonetheless, the pressure on convention easing is only going to mount as growth looks structurally pale. The timing and window of cuts is tricky and small amid fluid global dynamics, while the RBI may also want to weigh the FX cost of rate cuts (liquidity implication/sterilization cost, and imported inflation)," Emkay said.

In total 20 economists are predicting a rate cut in February 2025 policy by 25 bps. While some 5 economists believe a rate cut for FY26 will be in the range of 50-100 bps.

Rahul Bajoria, Head of India and ASEAN Economic Research at BofA Securities, "With slowing growth and potential return of headline CPI within the target band for a durable period, we see the window to cut rates opening in February, subject to global factors being conducive for rate moves. If the INR is broadly well-behaved and growth is weak, the RBI should be on track to cut rates once the supply shocks fade. We maintain our rate cut call in February MPC and continue to expect 100bp of cuts in the cycle, given a durable alignment of headline CPI close to 4% through 2025. This will bring the repo rate to 5.50% by end-2025, which we identify as being close to the neutral rate."

However, these economists also predict that there is an open window for RBI to cut the cash reserve ratio (CRR).

SBI Capital Markets said, that though a Dec'24 rate cut remains remote, the RBI may move to ease liquidity for productive uses in the economy by cutting the CRR. The government too may rapidly ramp up its revenue expenditure to provide support to the economy.

Here are the key outcomes of the poll:

December 2024 Policy: No Rate Cut, Repo Rate Seen At 6.50% In Q3 Of FY25. Cut In CRR Expected.

February 2025 Policy: 25 Bps Rate Cut, Repo Rate Cut Seen At 6.25% For Q4 and FY25-End.

RBI has kept the repo rate unchanged since February 2023, after hiking the key rate aggressively by 250 bps from May 2022-February 2023, due to the intense inflation pressure globally after supply-chain disruption escalated as a result of Russia's invasion of Ukraine. Currently, geopolitical tensions have continued at a boiling point in Russia and the Middle East.

CareEdge is expecting MPC to revise its inflation projection for FY25 upwards, aligning it closely to the 4.8% target, which is still higher than RBI's lower tolerance limit of 4%. While the rating agency is predicting a 6.5% growth rate for GDP for FY25.

Currently, the policy repo rate under the liquidity adjustment facility (LAF) is unchanged at 6.50%. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

In the October 2024 policy, the key decision of RBI was to change the monetary policy stance to 'neutral' and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

CPI inflation jumped sharply to 6.21% in October 2024, crossing RBI's upper tolerance limit of 6% for the first time in over 1 year. Meanwhile, India's GDP growth witnessed a setback, by hitting a staggering 5.4% which is the slowest growth in two years. Q2 GDP data missed market estimates of 6.5%, and RBI's target of 7%.

Six-members monetary policy committee (MPC) meeting has commenced from December 4th onward, and its outcome will be announced on December 6th. RBI governor Shaktikanta Das is chairing the 3-day meeting.