Interest rates have peaked for this cycle, cuts expected by mid-2024: Nilesh Shah

India’s GDP is projected to grow at 6.5% for FY24, according to RBI. This equilibrium in growth and inflation gives India the advantage to wait and watch and take a decision on cuts in the coming days, says Shah.

Kotak AMC’s Nilesh Shah believes that the Indian interest rates have reached a peak and we could expect cuts somewhere towards mid-2024.

“The RBI has the luxury to wait and watch what global bankers do and then take a decision,” said Shah during an interview with Moneycontrol. “My feeling is that the US at some point of time will be looking to cut rates and that will create a roadmap for Indian rates to come down,” he says. The RBI, he explains, has an advantage compared to the western world as India’s growth and inflation are in equilibrium.

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For now, the Fed, Shah explains, has been indicating ‘higher-for-longer’ rates because they are fighting for credibility after losing credibility in early 2021 when the Fed was criticised for their slow response to inflation after the pandemic. In 2022, US inflation had risen to a high of 9.1 percent as a result of the stimulus post-pandemic and supply-chain disruptions in the wake of the Russia-Ukraine war. Since 2022, the Fed raised rates 11 times in order to rein in inflation which stood at 3.7 percent in September 2023.

While the Fed has managed to regain some of its credibility by maintaining inflation and growth in equilibrium, interest rates will remain higher as the central bank faces the challenge of funding the large US government deficit and a rising US debt, Shah says.

But these higher interest rates will now mean more insolvency and more pressure on the banking system.  The US Federal Reserve also recently announced its decision to hold the federal fund rates between 5.25 - 5.5 percent, where it has been since July this year.

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On the other hand, in November 2023, during the RBI Monetary Policy meeting, the central bank had decided to keep the repo rate unchanged at 6.5 percent. The next RBI meeting will be held in December 2023. According to National Statistics Office data for September 2023, the Consumer Price Index (CPI) inflation has eased to 5.02 percent in September from 6.83 percent in August. This is a three-month low. India’s GDP is projected to grow at 6.5 percent for FY24, according to the RBI. This equilibrium in growth and inflation gives India the advantage to wait and watch and take a decision on cuts in the coming days, says Shah.

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