GoodReturns Poll: Will RBI Follow Fed's Playbook In October And Cut Rates? Economists Say Not Before December

The Reserve Bank of India (RBI) is most likely to defy the trends of global central banks' latest rate cut approach, especially of the giant US Federal Reserve, on October 9. MPC committee is likely to keep the repo rate unchanged at 6.5%, as per a poll of 36 economists conducted by GoodReturns.In. However, the probability of a change in stance cannot be ruled out. Meanwhile, the first rate cut is broadly seen in December policy, followed by February of FY25.

"RBI is set to remain on hold, for the tenth consecutive MPC, keeping repo rate at 6.50%. The guidance from RBI for near-term growth and inflation dynamics remains upbeat, and that rules out any material risk of a change in monetary policy guidance in the upcoming October MPC meeting," said Rahul Bajoria, India and ASEAN Economist at Bank Of America.

The three-day six-member MPC meeting commenced on October 7, with outcomes of the monetary policy to be presented by RBI governor Shaktikanta Das on Wednesday, October 9, 2024. The October policy to see new inputs from three new MPC members. They are - Economist Saugata Bhattacharya; Dr Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development; and lastly Professor Ram Singh, Director, Delhi School of Economics, University of Delhi.

As per the poll that was conducted between September 21st to October 5th, six out of 36 economists believe the chances of RBI softening its hawkish 'withdrawal for accommodation' stance is high to 'Neutral'.

However, two economists predict a 25 bps rate cut from the October policy.

"CPI inflation in India has remained below 4% in July and August 2024. However, RBI's expectation for the last two quarters of the current fiscal year is for CPI inflation to be higher than the monetary policy target rate of 4%, averaging 4.7% and 4.3% in 3Q and 4Q, respectively. Also, the 1QFY25 real GDP growth had fallen below RBI's expectations," D.K. Srivastava, Chief Policy Advisor, EY India said.

Srivastava added, "The RBI's Monetary Policy Committee may consider reducing the repo rate in its forthcoming meeting
in October 2024."

The majority consensus of the economists is that RBI is likely to keep rates unchanged for the tenth time in a row on October 9.

However, when questioned about whether RBI will follow the Fed's latest rate cut action, economists had a mixed opinion, with the majority agreeing that RBI does not necessarily need to.

Emkay Global in its research note said, "We maintain that the Fed's pivot will precede and impact the RBI's change in stance and rate action, even though the RBI maintains that Fed actions are not a key determinant in their rate actions."

However, Emkay also pointed out that as long as global market volatility remains contained, there will be flexibility for the RBI to stay focused on domestic inflation and risk management.

When will RBI cut rates? According to the poll, a total of 13 economists expect a rate cut by 25 bps points to start in December 2024 policy. That being said, these economists also expect 1 rate cut in 2024 from RBI.

BofA's Bajoria added, "We do not project any material forecast change, but the risk to RBI's headline GDP growth and CPI inflation forecasts for FY25 are biased to the downside. Slowing growth and falling inflation offer room for the RBI to cut rates in the coming months. We expect repo rate cuts of 100bp by December 2025, beginning December 2024."

Will the three new MPC members be dovish or hawkish on Wednesday?

According to Shilan Shah, Deputy Chief Emerging Markets Economist of Capital Economics, little is known about the monetary policy views of the Reserve Bank of India's incoming MPC members, but the fact that two of the committee's doves have been replaced suggests that the repo rate will remain on hold at 6.50% at the conclusion of its meeting on Wednesday 9th October.

Shah also believes that by December, the case for policy easing will be too compelling for the new-look MPC to brush aside.

How many rate cuts are expected in 2024? Majority of the economists predict one rate cut in the current year, and that is predicted to be 25 bps in December 2024.

Notably, in the financial year 2024-25, there are two rate cuts seen. The second rate cut is estimated in the February 2024 policy by 25 bps, taking the repo rate to 6%. Overall, the policy repo rate is expected to end FY25 ranging from 6-6.25%.

Moreover, these economists predict two to four rate cuts in 2025, ranging between 50 bps to 100 bps.

Apart from this, MPC members are likely to shed light on the latest global trends, especially the risks that could emerge through Middle East geopolitical tensions. This will provide further clarity on RBI's position in the rate cut.

Mandar Pitale, Head Treasury, SBM Bank India said, "MPC is also expected to deliberate upon the global factors such as growth inflation behaviour in developed economies, their rates actions happened in the immediate past, and the quantum of rate actions expected shortly amidst uncertain, nonlinear forward guidance on rate cuts coming from them indicating major challenges in store."

RBI has kept the repo rate unchanged since April 2023, to 6.5%. This is after RBI hiked the key rate by 250 bps from May 2022 to December 2022 to February 2023 policy, in the wake of the Russia-Ukraine war that led to supply-chain disruption and intensified inflationary pressure globally.

Currently, the global economy is in a similar situation with Israel now in an offensive riff-off with Hezbollah and Hamas, the two proxies of Iran who have also stepped into the warzone with heavy missile attacks on Israel. There is fireball in both Gaza and Lebanon currently, while the real question is, will Israel take the war directly at the borders of Iran?

As per Acuité Ratings & Research, while the fear of the inflation "elephant" may have subsided with the CPI headline print well within 4.0% over the last two months and a favourable monsoon, the concerns around the stability of food inflation still linger among policymakers. Secondly, there has been a sudden escalation of the chronic geo-political conflict in West Asia with a confrontation between Israel and Iran which has the potential to spike global oil prices and raise the uncertainty around the inflation outlook.

Other key policy rates are also kept unchanged with the standing deposit facility (SDF) rate at 6.25, meanwhile, the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. RBI's inflation and economic growth projection will be keenly watched this week.