Moneycontrol Pro Panorama | A winter rate cut is coming

It's clear that the RBI seems to be convinced now that the rate hike cycle that started since May, 2022 is over; the fight against inflation is at its final phase

Dear Readers,

The big news of Wednesday is not the RBI-led monetary policy committee (MPC) leaving interest rates unchanged but the change in the policy stance that signals a key change in the thinking of the central bank top brass.

The intent is clear. A winter rate cut is on the way.

More than what the governor said, what he didn’t say in the policy statement needs closer attention. There is a not-so-subtle hint of a strategy shift.

If we cut out the jargon then it's clear that the RBI seems to be convinced now that the rate hike cycle that started since May, 2022 is over; the fight against inflation is at its final phase.

That’s the reason why the MPC has changed the monetary policy stance from ‘withdrawal of accommodation’ to ‘neutral’. It is nothing but preparing the ground for a rate cut. A neutral stance is a message to the market that the rate pivot can happen anytime now.

If you were paying close attention to the speech, you may have heard Das’ analogy of a horse in reference to the fight against inflation. He said that the horse has been brought back to the stable with great difficulty, referring to the inflation battle. It is his way of saying that the inflation monster has been subdued.

To be sure, this comment was followed by a word of caution. “ “We have to be very careful of opening the gate and need to keep the horse to a tight leash”. But, that’s typical central banker speak to ensure that there is enough leeway to change one's view if the situation were to change.

I would place my bet on a December rate cut. The odds are high. There is a sense within the central bank that the inflation fight is achieved. Of course, the RBI can’t declare a victory on inflation yet considering the last mile challenges that are explained in this analysis of the policy.

Stock markets have got the hint and reacted positively with both the Nifty and Sensex jumping and bond yields easing in the hope of a rate cut in the aftermath of the RBI policy announcement.

An interest rate cut at this point will lower the borrowing costs of individual borrowers. It can thus spur demand at all levels. More critically, it can lower the borrowing/repayment costs of small companies as well. Therefore, the markets liked Das’ hints.

Though the RBI has changed its stance to neutral, the tricky part will be handling the upside risks to inflation. There are three key risks that the RBI has to assess before the first rate cut happens.

The impact of global geopolitical factors, a resurgence in food inflation and the trajectory of core inflation.

In today's Chart of the Day, we explain the link between food inflation and vegetable prices. Retail inflation has shown early signs of easing to that target level but it is not there quite yet. The MPC would love to wait a little more to see if the trend sustains.

Before the December meeting, there will be two rounds of inflation prints—September and October. September may see a higher inflation number, but this will be largely due to a base effect.

Economists are already betting for a rate cut in December. Rating agency Crisil’s chief economist D K Joshi, expects a 25-basis-point reduction in the repo rate during the MPC’s policy review meeting in December, in response to the expectation that food inflation will decline. In fact, Crisil also expect GDP growth to moderate to 6.8% this fiscal compared with 7.2% forecasted by RBI for this year. A growth slower than predicted will increase the clamour for bigger rate cuts. However, not all are on the same page. ICRA's chief economist Aditi Nayar writes in Moneycontrol Pro that a rate cut in December is not a done deal but if a few macro indicators play a supportive role then it could still take place.

Don’t miss these takes on the RBI policy announcement by Aparna Iyer who writes on what can influence the pace and extent of rate cuts and Neha Dave writes about how rate cuts are expected to be shallow, based on where real interest rates are at present.

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Dinesh Unnikrishnan
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