Fed policy impact: Taking cues, RBI may look to cut interest rates in mid-FY25, say experts

RBI Governor Shaktikanta Das during December monetary policy said that the Reserve Bank will remain nimble in liquidity management.

The Reserve Bank of India (RBI) may weigh lowering the interest rate around middle of 2024-25, experts said after the US Federal Reserve kept its key interest rate unchanged for a third straight time and signalled that it is likely done raising rates on December 13.

The Fed policymakers also signalled that they expect to make three quarter-point cuts to their benchmark interest rate next year.

"However, the risk that the RBI could have found itself deviating from the Fed rate cycle if the Fed continued to push the rate cuts forward has now reduced. We see rate cuts by the middle of 2024 both in the US and India," said Sakshi Gupta, principal economist at HDFC Bank.

The US Fed kept rates unchanged at 5.25-5.5 percent and signalled that the rate hike cycle may be over with the dot plot showing no further rate hikes were pencilled in.

"Moreover, growth in India remains on the stronger side and inflation is expected to move towards the 4 percent target from only from Q2FY25 onwards. Hence, we expect the RBI to lag the Fed with a rate cut cycle starting from August or October 2024," said Gaura Sengupta, economist at IDFC First Bank.

RBI Governor Shaktikanta Das, while announcing the monetary policy committee’s (MPC) decision on December 8, said the central bank's decision to keep interest rates unchanged does not imply a shift towards a neutral stance as concerns about inflation remain.

"If somebody is assuming that five meetings in a row of no rate action means a neutral stance, it would not be correct at all. We are not giving any kind of a signal that we are moving towards a neutral stance," he said.

The RBI's Monetary Policy Committee voted unanimously to maintain the repo rate at 6.5 percent. Nearly all committee members also favoured retaining the policy stance of "withdrawal of accommodation", suggesting that interest rates might stay elevated for now.

Inflation in India

The consumer price index (CPI) increased to 5.55 percent in November 2023, according to data released by the Ministry of Statistics and Programme Implementation on December 12. At 5.55 percent, the CPI inflation print for November 2023 is 68 basis points (bps) higher than October's 4.87 percent. One basis point is one-hundredth of a percentage point.

Also read: Inflation lower than expectations, RBI may opt for a prolonged pause, say experts

The central bank, which has kept the key policy rate unchanged over the past four meetings, expects inflation to average 7 percent in FY24, a jump from 6.7 percent in FY23.

Das said that the central bank remains highly alert and prepared to take steps to align inflation to the target.