70% chance that RBI will cut rates by 25 bps in upcoming MPC; says Deepak Agrawal of Kotak Mahindra MF

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There is a 60-70 percent chance for the central bank to cut the repo rate by 25 basis points along with a 50 basis point cut in cash reserve ratio (CRR) in the upcoming monetary policy committee (MPC) meeting said Deepal Agrawal, CIO of fixed income at Kotak Mahindra Mutual Fund.

"If the RBI revises its growth projection downward by 70 basis points and raises its inflation projection by 10 to 20 basis points for FY25, there is a strong case for a rate cut," he said at the launch of Kotak AMC's market outlook for 2025.

The weak GDP growth in Q2FY24, at 5.4%, compared to 6.7% in Q1FY24, results in an average first-half growth of around 6 percent, he said. "Based on GST collections, H2FY24 growth may also remain weak, likely in the range of 6.5 percent to 7 percent, rather than the anticipated 7.5 percent. This will take the full-year GDP growth 70 basis points lower than RBI's projection of 7.2 percent," he said.

The MPC of the central bank has begun its three-day meeting on Wednesday to decide on interest rates and its policy stance. In its last policy meeting in October, the MPC kept the benchmark repo rate unchanged at 6.5 percent for the tenth straight meeting. However, the MPC changed the policy stance to ‘neutral’ from ‘withdrawal of accommodation’.

In the past month, the currency has depreciated from 84.2 to 84.7, and the RBI has been using its reserves to defend it, said Agrawal. Despite this, and with current inflation at 6 percent, the RBI focuses on future inflation when setting monetary policy and by FY26, inflation is expected to be around 4 percent, he said.

Therefore, he says, from now until December 2025, the RBI is likely to cut rates by 50-75 basis points, focusing on the long-term inflation outlook rather than current inflation.

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