Crisil expects RBI to initiate repo rate cuts from mid-2024

The Reserve Bank of India (RBI) maintained the status quo in the repo rate for the seventh time this month. The rating agency Crisil now expects the rate cut cycle to begin from mid-2024.
The repo rate is the rate of interest at which the RBI lends to other banks.

Along anticipated lines, RBI kept the policy repo rate unchanged at 6.50 per cent, the seventh time in a row.

"We expect the RBI to initiate rate cuts in mid-2024," Crisil said in a report, with a rider that weather and crude prices are key monitorables.

"Food, the pain point for inflation last year, could ease if monsoon turns normal this year, as early weather forecasts suggest," it asserted.

Given the uneven inflation trends, the monetary policy committee of the RBI is awaiting clearer signs of easing towards the 4 per cent inflation target. "Strong domestic growth momentum has provided it space to do so."

Retail inflation in India is in RBI's two-six per cent comfort level but is above the ideal 4 per cent scenario. In March, it was 4.85 per cent. Inflation has been a concern for many countries, including advanced economies, but India has largely managed to steer its inflation trajectory quite well.

Barring the latest pauses, the RBI raised the repo rate by 250 basis points cumulatively to 6.5 per cent since May 2022 in the fight against inflation.

Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.

On inflation, Crisil expects consumer price index (CPI)-linked inflation to soften to 4.5 per cent in the current financial year 2024-25 from an estimated 5.5 per cent previous year.

"Normal monsoon and healthier farm output should help moderate inflation this fiscal. A non-inflationary budget that focusses on asset-creation rather than direct cash support bodes well for core inflation."

Meanwhile, RBI retained its inflation projection for 2024-25 at 4.5 per cent with Q1 at 4.9 per cent, Q2 at 3.8 per cent, Q3 at 4.6 per cent, and Q4 at 4.5 per cent. However, it noted that the outlook for inflation will largely be shaped by food price uncertainties (indications of a normal monsoon on one side while increasing incidence of climate shocks on other side).