India's Central Bank May Implement Rate Cuts In Early 2024 As Inflation Eases, S&P Predicts

India's central bank, the Reserve Bank of India (RBI), is expected to implement rate cuts in early 2024 as inflationary pressures eases toward the 4% target, according to credit rating agency S&P Global Ratings.

"In India, under the assumption of normal monsoons, we expect headline consumer inflation to soften to 5% in fiscal 2024 from 6.7%," the rating agency said in a report dated June 25 that was released to the media on Monday.

"Softer crude prices and tempering of demand will bring down fuel and core inflation, respectively."

Retail inflation in India dropped to a more than two-year low of 4.25% in May, primarily due to easing cost pressures on food. This figure remained within the Reserve Bank of India's (RBI) target range of 2-6% for the third consecutive month.

Since May 2022, the RBI's monetary policy committee has raised the repo rate by 250 basis points. However, in both April and June of this year, the committee decided to keep the rate steady at 6.50%. It is widely anticipated that the committee will pause on further rate hikes for the remainder of 2023.

S&P Global Ratings stated that India's inflation and rate hike cycles have reached their peak. The agency predicts that inflation will average 5% during this fiscal year, slightly below the RBI's forecast of 5.1%. Additionally, S&P Global Ratings forecasts a 6% growth in India's gross domestic product.

The pressure on central banks to hike rates has decreased as Asia's inflation and external deficits have decreased, according to S&P. Despite increasing requests for rate decreases, the report stated that given the high interest rates in the US at the moment, there isn't much opportunity for lower rates in the near future.

The repo rate is anticipated to decrease by 25 basis points this fiscal year, reaching 6.25% by March-end, according to S&P. The rate might then be reduced by 100 basis points over 2024-2022, according to the RBI.