The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to cut repo rate by 25 basis points (bps) in the upcoming monetary policy due to comfort provided by the lowest ever Consumer Price Index (CPI) Inflation in the last two months, according to the Moneycontrol’s poll of 18 economist, treasury heads of banks, and fund managers.
If a rate cut happens in December, it will be the first reduction by the central bank after maintaining status quo in last two policies.
The RBI has so far reduced repo rate by 100 bps from 6.5 percent to 5.5 percent between February and June. Post that the RBI has maintained a status quo in August and October policy.
Anshul Chandak, Head of Treasury at RBL Bank said real rates are too high and one cut is required to reduce real rates and support growth. “Also pass through of last cuts have happened so time has come to cut again.”
Further, Debopam Chaudhuri, Chief Economist at Piramal said more than expected decline in inflation and less than expected rate cut transmission gives a rationale for the rate cut.
The MPC will meet between December 3 and 5 for another round of rate setting deliberations.
Experts believe that the central bank will maintain its ‘neutral’ stance and keep its tone dovish in the upcoming policy. This tone is targeted at lowering interest rates to increase spending and lending, as well as providing a boost to faltering economic growth.
However, few experts believe that the central bank will hold the rates as inflation trajectory, which shows an uptick going forward will make less room for the cut.
“Forward looking inflation indicates headline inflation rising to 4 percent in H2FY27. Based on this trajectory the space to ease rates is limited,” said Gaura Sengupta, Economist at IDFC First Bank.
CPI Inflation
Most economists and experts are of the view that the central bank will revise down the projections on the CPI inflation in the December policy taking comfort from the lower outlook in the last two months.
India’s retail inflation eased sharply to 0.25 percent in October, its lowest level in the current series that began in 2013, down from 1.44 percent in September.
The moderation was led by a continued decline in food prices, with the food index falling to -5.02 percent in October from -2.3 percent in the previous month, reflecting a broad-based softening in key staples and edible items.
On November 13, Moneycontrol reported that moderation in India’s retail inflation to a record low in October has provided the RBI with greater space for the rate cut if the growth remains weak in the second of the current financial year.
“CPI inflation to be lowered to 2.3 percent for current year and next year CPI projection changed to around 4 percent,” said Murthy Nagarajan, Head-Fixed Income at Tata Asset Management.
Further, Madhavankutty G. Group Chief Economist at Canara Bank said CPI is expected to be revised downwards to 2.1 percent from 2.6 percent.
GDP Growth
Most experts are of the view that the central bank may revise upwards GDP growth if the India-US trade deal reach and in absence of conclusion of deal, the revision is unlikely.
“No change if a trade deal isn’t reached. In case a deal is reached then FY26 GDP could be revised up to 7 percent plus,” said Gaura Sengupta, Economist at IDFC First Bank.
However, few experts said that there might be upward revision in GDP to 7 percent due to strong rebound in the economy amid GST cut.
“GDP projections likely to be revised upwards to 7 percent,” said Madhavankutty G. Group Chief Economist at Canara Bank.
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