RBI may cut repo rate by 25 bps to 6.25% in December, say economists; volatile food prices remain a worry

The Reserve Bank of India (RBI) may cut its key policy rate by 25 basis points to 6.25 per cent in December to boost economic growth, according to a Reuters report citing a poll of economists. It is expected that the inflation will be moderate in the near term.

In September, inflation rose to 5.49 per cent. However, the forecast expects it to cool down to 4.9 per cent in the current quarter. In the January to March quarter, inflation is expected to drop to 4.6 per cent, which will allow the RBI to ease rates, the report said.

The interest rate has been held the highest since 2019 for the last 10 meetings.

Recently, RBI Governor Shaktikanta Das stated that the balance between inflation and growth is “well-poised.” He expects inflation to moderate in the next quarter.

In the recent monetary policy committee meeting, the RBI changed its stance to neutral from the previous withdrawal of accommodation stance; now, economists expect a minimal slowdown in growth and therefore, a rate cut is predicted, the report said.

However, according to the poll, a slim majority of economists, 30 out of 57, expect a rate cut by 25 basis points to 6.25 per cent at the next monetary policy meeting. The rest do not expect any change in rate.

India is expected to be the fastest-growing economy. However, the growth forecast has dipped to 6.9 per cent in the current fiscal year and 6.7 per cent in the next year from 8.2 per cent in FY23-24. This is much lower than RBI's projections of 7.2 per cent and 7.1 per cent.

"Our baseline view is predicated on the next GDP report due in late November falling well short of the committee's unusually rosy forecasts," the report said quoting Miguel Chanco, economist at Pantheon.

"I don't think the fact economic growth in India is faster than most major emerging markets is a barrier to some monetary policy easing...It's one of the least-developed major emerging markets on a per capita basis," Chanco said.

Economic activity is losing momentum

“What matters for policy is the direction of travel and it's clear from most economic indicators activity is losing momentum,” Chanco added.

Meanwhile, the estimated inflation will be above RBI's medium target of 4 per cent till early 2026, which leaves little room for the central bank to cut rates.

According to the poll, after the December rate cut, the RBI is expected to cut rates again in February.

The US Federal Reserve and European Central Bank have already cut rates by at least 50 bps recently.

However, it is still unclear if the RBI will announce its first rate in a long time.

"Monetary policymakers have been stressing their vigilance over volatile food prices and their feed-through to the core elements of the consumer basket, so it is likely the bank will wait for longer to rest assured inflation dynamics are under control," the report said quoting Alexandra Hermann, economist at Oxford Economics.

“The risk for a rate cut to be delivered as soon as December has increased, especially if Q3 (July-September) GDP growth numbers surprise to the downside. Still, we believe the RBI is in no immediate hurry and will wait until its first meeting in 2025 to loosen monetary policy settings,” Hermann added.