No RBI rate cuts before Q3FY25, says Kotak Institutional Equities; sees a stance change in Q1

Even though the inflation trajectory has begun softening, brokerage house Kotak Institutional Equities expects the first repo rate cut to only be in the third quarter of the next financial year, FY25. However, prior to rate cuts, the brokerage expects the Reserve Bank of India (RBI) to change its stance to neutral.

"We expect the first repo rate cut only in Q3FY25 conditional on (1) easing food price pressure, and (2) the US Fed’s rate cut cycle starting in H2CY24. Prior to rate cuts, we expect the RBI to change its stance to neutral by end-1QFY25. On the liquidity front, we expect the RBI to continue to fine-tune system liquidity to anchor overnight rates closer to the repo rate," said the brokerage.

Read here: RBI Policy: Governor Das unlikely to precede Fed in policy reversal; expect rate cut only in H2, say Economists

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) this month decided to keep its key policy rate unchanged at 6.5 percent in line with the expectations. While maintaining the stance of 'withdrawal of accommodation', RBI Governor Shaktikanta Das highlighted that stance should be seen in the context of 'incomplete transmission and inflation ruling above the target of 4 percent and our efforts to bring it back to the target on a durable basis.'

The RBI governor also reiterated their commitment to remain vigilant of the evolving liquidity situation and ensure that money market interest rates evolve in an orderly manner and financial stability is maintained.

Moreover, Kotak also forecasted that in FY2025, baring a sub-4 percent average in Q2FY25, it does not see inflation settling around the 4 percent target (average inflation expected at 4.5 percent from 5.4 percent in FY2024E).

Read here: Inflation is cooling but RBI has no reason to cut rates before June, say experts

"As expected, the inflation trajectory has begun softening. However, uncertainties remain from (1) adverse weather events impacting food prices, and (2) the Red Sea conflict (among other geopolitical tensions) impacting energy prices," explained Kotak.

India's consumer price index (CPI)-based retail inflation fell to a three-month low of 5.1 percent in January, supported by a slower rise in prices of food items. Core inflation continues to moderate, reaching its lowest level in more than 50 months. Even though the current inflation rate is comfortably within the RBI's upper tolerance band of 6 percent, it remains above the central bank’s target of 4 percent.

Read here: Inflation is cooling but RBI has no reason to cut rates before June, say experts

"January CPI inflation at 5.1 percent (December: 5.7 percent; Kotak estimate: 5.3 percent) was broadly in line with expectations. Sequentially, headline inflation contracted by 0.1 percent (December: -0.3 percent) led mainly by vegetables, followed by fruits, spices, pulses, and oils and fats. Meanwhile, prices of cereals, meat and fish, and eggs increased in January. Positively, durable inflation (though elevated) and food and beverages inflation (excluding vegetables and fruits) have been on a downtrend over the past few months," noted the brokerage.

It further stated that core CPI inflation (CPI, excluding food and beverages, and fuel) was at 3.5 percent (December: 3.8 percent). Sequentially, core CPI increased by 0.3% (December: 0 percent MoM), led by higher medical costs, bus/tram fares, and gold. Overall, the moderation in various measures of core inflation will continue to provide comfort to the MPC. Kotak expects FY2024E-25E core inflation to average 4.4 percent in both years.

Read here: RBI MPC: MPC keeps FY24 inflation forecast unchanged at 5.4%.

Meanwhile, post the inflation numbers, brokerage house Motilal Oswal said that it sees inflation hovering between 5 and 5.5 percent, led by food in H1CY24, before easing in Q3 towards 4 percent and rising back to 4.5-5 percent in the next two quarters. “Thus, we don't see any monetary policy action based on inflation this year. It will be determined by the domestic growth trajectory (if it turns out much weaker than the general forecast of 6.5-7 percent) or if the US FED makes a sharp move,” added the brokerage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision. (edited)