RBI Maintains Policy Rates Unchanged, Rate Cut Expected in H2: Economists

The Reserve Bank of India (RBI) held its bi-monthly Monetary Policy Committee (MPC) meeting and has decided to keep its key policy rates unchanged, according to Governor Shaktikanta Das. The RBI’s stance remains focused on the “withdrawal of accommodation”, considering the incomplete transmission and inflation above the target of 4%.

Economists believe that the RBI will not rush into easing rates and expect a rate cut only in the second half of 2024. The majority of economists see the policy pause being extended for now.

The RBI’s decision indicates a commitment to withdrawal of accommodation and aligning inflation with the target while supporting growth, according to Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India. The central bank aims to balance growth-oriented measures with strengthening the financial landscape against future shocks.

Madhavi Arora, Lead Economist at Emkay Global Financial Services, mentioned that the policy tone remained neutral, supported by favorable macro and market conditions. The domestic dynamics are confident, external financing needs are being met, and there are upgrades in growth projections. Arora expects a change in stance beyond April, providing time for understanding and adjusting to global dynamics.

According to Sonal Badhan, an economist, the earliest possible change in the RBI’s position may occur in June 2024, only if inflation falls significantly below expectations. Otherwise, a change cannot be expected before August 2024. Indranil Pan, the Chief Economist, suggests that the RBI may have an opportunity to cut rates around the August 2024 policy, but there are risks of delay.

Rajani Sinha, Chief Economist at CareEdge Ratings, believes that the RBI will remain cautious due to the risk posed by high food inflation. As long as there is healthy economic growth, the central bank can maintain the status quo for some time. However, a rate cut can be expected in the second half of the year as domestic inflation concerns recede and the US Federal Reserve starts cutting rates.

The RBI’s GDP growth projections for FY25 stand at 7%, with upward revisions in quarterly estimates. The central bank expects robust growth based on the resilience in services activity, profitability in the manufacturing sector, increased consumption demand, steady Rabi sowing, and government focus on capital expenditure. Downside risks could arise from geopolitical tensions and volatility in international financial markets.

RBI has retained its CPI inflation projection for FY24 at 5.4%, but has lowered the Q4FY24 estimate to 5%. For FY25, inflation is expected to be 4.5%, with quarterly estimates revised downwards. These projections consider satisfactory Rabi sowing and decreasing vegetable prices, as well as the assumption of a normal monsoon in FY25. Upside risks may arise from volatility in international markets.