GR Poll: RBI To Hold Rates On June 7 After Election Results; 25-50 Rate Cut Seen In 2024, But When?

After the BJP win in the 2024 Lok Sabha Election, the eye of the ball is now the Reserve Bank of India (RBI) which will announce the second bi-monthly monetary policy of FY25 later this week. A poll of 20 economists was conducted by GoodReturns.In, said RBI is likely to hold the repo rate at 6.5% while keeping the 'withdrawal to accommodation' stance unchanged. However, a revision in the GDP forecast has not been ruled out. If that is the case, RBI will hold rates for the eighth time in a row since April 2023.

India's CPI inflation has been cooling off and reached 4.83% in April 2024, at an 11-month low. Further gradual easing is expected for FY25 to reach RBI's medium-term target of 4%. However, food prices, monsoon conditions and commodity prices play a potential spoilsport for not only CPI but also a rate-cut scenario in later 2024.

RBI's medium-term target for consumer price index (CPI) inflation is 4 per cent within a band of +/- 2 per cent while supporting growth.

Prasenjit K Basu, Chief Economist At ICICI Securities said, "CPI inflation was largely unchanged in Apr'24, edging down to 4.83% YoY (from 4.85% in Mar'24), with core inflation abating to a 12-year low of 3.23% YoY in Apr'24. Although inflation remains confined to food (particularly vegetables and cereals), it has not moderated enough to warrant a rate cut at the Jun'24 MPC meeting."

Furthermore, the policy stance is also likely to continue in the June policy.

Vikrant Mehta, Head - Fixed Income, ITI Mutual Fund said, "The Monetary Policy Committee (MPC) will meet over June 5-7, 2024, to review the policy repo rate as well as communicate the policy stance. Since the MPC's last meeting, geopolitical volatility rose in the first half of April, and though it appears to have subsided post that, underlying tensions continue to simmer. Furthermore, global markets now anticipate the Fed to be on a "longer than anticipated hold" as compared to March."

Thus, in the current environment, Mehta added, "though India's headline inflation is expected to moderate further, we feel that the RBI is unlikely to make changes to both - policy rate as well as the stance of the policy."

Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA also added, "With continued uncertainty, especially on the risks to the food inflation trajectory after Q2 FY2025, the chance of a stance change in the upcoming June 2024 monetary policy review appears rather dim."

However, these analysts predict that a revision in GDP and inflation forecasts is likely to be revised in the June policy.

Atul Monga, CEO & Co-founder of BASIC Home Loan said, "Forecasts regarding inflation might be revised down slightly, while growth predictions regarding GDP are expected to remain stable."

Indian economy continued to show resilient performance, outperforming other global countries. India's GDP growth rate came in at 7.8% in Q4FY24, while for the full fiscal year 2023-24, the growth was at 8.2%. The growth has been far better than RBI's estimate of 7% GDP in FY24.

After Russia invaded Ukraine, inflationary pressures escalated globally which pushed major central banks to hike key fund rates including RBI. From May 2022 to February 2023, RBI raised the policy repo rate by 250 bps to 6.5%. However, with economic conditions easing, inflation has started to pull back moderately. Accordingly, RBI has been in a wait-and-watch mode since the start of FY24 by maintaining the status quo.

Accordingly, RBI has also maintained 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%. Further, MPC has stayed focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Going forward from the June policy, a rate hike scenario has been ruled out by these analysts, but the possibility of rate cuts by 25-50 bps is expected in the second half of 2024.

The majority of the economists in the poll are predicting the first rate cut in the last quarter of 2024, most likely in the December policy. However, some of them expect a 25 bps cut in either August or October. While Goldman Sachs predicts a 25 bps cut in December 2024, and another 25 bps cut in Q1 of 2025.

ICICI Securities economist expects a 25 bps cut in August 2024, and another 25 bps cut in December of the same year.

Basu said, "Heatwave conditions across India have caused fruit, meat and vegetable inflation to remain high, implying the risk of headline inflation remaining close to 5% YoY in May'24. The emergence of a La Nina from Jun'24, however, and the onset of the monsoon should provide substantial relief. While Jun'24 inflation is still likely to be above 4.5% YoY, the high base from Jul-Aug'23 is likely to allow the headline CPI inflation rate to abate to 3.7% YoY in Q2FY25. We retain our forecast of a 25bp rate cut at the Aug'24 MPC meeting, with a second 25bp rate cut likely in Dec'24."

Basic Home Loan co-founder Monga said, "While an immediate rate cut may be on the radar, the potential reduction in the rates is likely to happen later in the year - maybe sometime around October this year."

Meanwhile, Kotak Institutional Equities expected a rate cut from Q3FY25, and it factored in about a 50 bps cut. Kotak's note said, "Headline CPI inflation at 4.8% and core inflation at 3.2% were broadly unchanged from March levels. Inflation has been panning as we had expected. We continue to pencil in a gradual moderation in headline inflation toward the RBI's 4% target. However, upside risks will remain from adverse weather conditions and commodity prices. We maintain our FY2025 average headline inflation estimate of around 4.5%. We continue to factor in a 50 bps repo rate cut in FY2025, starting from 3QFY25."

Moreover, Parijat Agrawal, Head - Fixed Income at Union Mutual Fund believes that any rate cut will depend upon CPI moving towards 4% on a durable basis and is also contingent on US FOMC decision.