RBI has played conservative on both growth and inflation; may follow Fed for rate cuts

Hopefully, food inflation should not be a problem next year. So most likely, RBI's inflation target will be achieved, Agrawal said

The market was hoping that the Reserve Bank of India could revise the inflation forecast slightly lower for the next year, given lower core inflation. But it seems that they are maintaining the inflation rate at similar levels due to the recent spike in crude oil prices. Secondly, there was expectation that the Governor would probably revise the growth estimate upwards, but the same estimate was retained.

So I think the RBI has played conservatively on both growth and inflation fronts. If crude oil price continues to remain at $80-85 dollars per barrel, inflation target is likely to be met.

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Hopefully, food inflation should not be a problem next year. So most likely, RBI's inflation target will be achieved, assuming crude stabilises between $85 and $90 per barrel. And growth can continue to be at 6.5-6.7 percent. Growth this year has been surprising. There is some inherent strength in the economy.

So broadly, India is in a good position with high growth and low inflation. There is a case for changing the stance to ‘neutral’ because our real rates are close to 200 basis points -- 6.5 percent repo rate and 4.5 percent inflation. Based on real CPI, the real rate is upward of 250 basis points.

This high growth gives leeway to RBI to continue to wait for actual monetary easing in the developed nations. Good domestic macros give RBI the leeway to continue with the same stance till the time we see monetary easing globally.

The US Fed is likely to cut rates by 50-75 bps in CY 2024. Post that, the RBI is likely to change stance and cut rates in the later part of FY 2025.

We are not expecting deep rate cuts in this cycle. But can we have a 50 bps rate cut where the US cuts rates by 100-150 bps over 2 years? Yes, we can see a 50 bps rate cut in the second half. But probably cuts will be gradual if our growth continues to remain strong.

For people like us who were not expecting anything, the fear was whether the RBI Monetary Policy Committee would change the stance to neutral. Since it did not happen, the policy was broadly in line with expectations.

The policy was not too hawkish either. I think the tone was relatively slightly softer than the February 2024 policy.

Deepak Agrawal is CIO-Debt, Kotak Mutual Fund

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