As RBI MPC dashes repo rate cut hopes, analysts predict easing in second half of 2024

RBI announced to keep interest rates steady at 6.5 percent

The stress on inflation in the RBI monetary policy statement and in the speech of Governor Shaktikanta Das have dashed hopes of a rate cut in the near future, prompting analysts to defer their expectations to the second half of 2024.

The Reserve Bank of India Monetary Policy Committee (RBI MPC) on February 8 kept the repo rate unchanged at 6.5 percent, in line with the market expectations. But Governor Das refrained from providing guidance on future rate cuts, disappointing the Street. The BSE Sensex and the NSE Nifty 50 reacted, falling around 1 percent at close.

This is the sixth consecutive time that the RBI MPC has kept the key policy rates on hold.

As Das said that the fight against inflation was not over yet, brokerages now believe that the RBI will not rush to adopt a dovish stance, with the first rate cut likely only in the second half of 2024 (H2CY24). "We expect limited rate cuts of 50 basis point (bp) from mid-2024, taking the repo rate to 6 percent. We believe that the RBI will wait for cues from the US Fed before deciding its next step," analysts at HSBC said.

Also read: Rate cut unlikely till Sept, but RBI may change policy stance by June

Nomura predicts that 100 bps of cumulative rate cuts would start from August 2024. "We expect the pause to extend for now. The monetary policy pivot will follow the liquidity pivot and one-year inflation projection suggests that the real policy rate is around 1.8 percent," they wrote in an MPC review note.

On the other hand, Barclays and Morgan Stanley predict rate cut cycle to begin a little earlier, from June 2024 onwards. "We expect rates to be on hold and build shallow rate cut cycle from June onwards. Inflation is likely to moderate to 5.1 percent in H1CY24 and 4.1 percent in H2CY24," said Morgan Stanley analysts.

The first objective of the RBI is to keep inflation at the target of 4 percent with a band of +/- 2 percent. Governor Das highlighted that the last mile of disinflation is always the most challenging, saying that stable and low inflation will provide bedrock for sustainable economic growth.

Also read: Daily Voice: This CIO expects RBI to change stance to 'neutral' next quarter, says rate cut will have to wait

Though India's headline retail inflation has declined from its 15-month peak touched in July last year, it is still above the RBI's tolerance band of 2-6 percent. In December 2023, India's retail inflation hit a four-month peak of 5.7 percent, up from 5.55 percent in the previous month, primarily due to an increase in food prices.

However, the government is confident to rein in inflation going ahead as it has forecast the consumer price index (CPI) inflation at 4.5 percent for FY25. The headline inflation for FY24 was kept unchanged at 5.4 percent, while it downgraded inflation projection for Q4FY24 to 5 percent from 5.2 percent.