Rate cut not off the table in December policy despite change in voting pattern; inflation trajectory key, say experts

Reserve Bank of India

A rate cut by the Reserve Bank of India (RBI) in its December policy is not off the table despite the change in the voting pattern of Monetary Policy Committee (MPC) members, experts told Moneycontrol.

The RBI could act on the rate action sooner than later if inflation prints remain under control and domestic conditions play well going ahead, most experts said.

“A rate cut in the December policy cannot be ruled out. The RBI may continue to remain data dependent, and if domestic conditions stay favourable, the central bank might choose to act sooner than later — given the expectation that inflation will move closer to 4 percent by Q4 FY25,” said Sakshi Gupta, Economist at HDFC Bank.

Voting pattern

Doubts about a rate cut in December stem from the voting pattern in the recent October policy, which is a tad different from that in the August MPC meeting. In the October meeting, five members voted to keep the repo rate unchanged, while one batted for a rate cut. The identity of the dissenting member will be known when the RBI releases meeting minutes.

When seen against the voting pattern in August, October's MPC meeting seems to be a bit of a departure in trend.

In the August MPC four members voted for the status quo and two voted for a rate cut. External members Ashima Goyal and Jayanth R Varma voted in favour of reducing the policy repo rate by 25 basis points (bps) in August. One basis point is one-hundredth of a percentage point.

Inflation vagaries

The central bank in the October monetary policy has increased the Consumer Price Index (CPI) inflation projections for the third quarter, which has raised the probability of deferment of a rate cut by another two months or so, that is earliest by February next year.

The RBI raised Q3FY25 inflation projections marginally by 10 bps to 4.8 percent in the October MPC meeting from 4.7 percent projected in the August policy.

On the other hand, it reduced the inflation projection for the second quarter of FY25 to 4.1 percent in the October policy, as against 4.4 percent projected in the earlier policy.

Similarly, the central bank cut Q4FY25 CPI inflation to 4.2 percent, as compared to the 4.3 percent projected in the August monetary policy.

HDFC Bank’s Gupta added that the near-term inflation outlook remains uncertain. September inflation may go up due to an unfavourable base effect, which will lead to the inflation print coming over 5 percent. Moreover, any sharp increases in global commodity prices and domestic weather related disruptions in the coming quarter could keep the pressures on inflation alive, raising the possibility of a move by the RBI only in early 2025.

The change in stance from 'withdrawal of accommodation' to 'neutral' in the October MPC meeting has also increased the expectations of a rate cut in December, though the inflation fine print may assume greater relevance in deciding the swing for rate action.

The central bank expects CPI inflation to see a big jump in September on an unfavourable base and a pick-up in food prices caused by the lingering effects of a shortfall in the production of onion, potato and chana dal among other factors.

The CPI inflation would experience an unfavourable base effect of 1.1 percentage points in September, according to the RBI governor’s statement.

Headline inflation moderated to 3.6 percent in July from 5.1 percent in the previous month due to a base effect of 2.9 percent, which more than offset the month-over-month increase of 1.5 percent. In August, inflation rose to 3.65 percent.

The CPI inflation print declined to a 59-month low of 3.5 percent in July, below the RBI’s inflation target of 4 percent.

The RBI has kept the repo rate unchanged for the past 10 consecutive MPC meetings. The immediate focus is on bringing down inflation to the target or below it. Currently, the RBI’s repo rate is at 6.5 percent.

Earlier, the MPC had steadily raised the repo rate by 250 bps, starting from May 2022.