Inflation unexpectedly spiked to 5.49% in September, but was forecast to cool to an average 4.9% this quarter and drop to 4.6% in January-March, giving the Reserve Bank of India (RBI) room to ease policy.
The central bank has held interest rates at their highest since early 2019 for the past 10 meetings.
Governor Shaktikanta Das recently said the balance between inflation and economic growth was “well-poised” and inflation was projected to moderate next quarter.
A change in stance to ‘neutral’ this month and economists now expecting a slight slowdown in growth has tipped the scales slightly in favour of a rate cut.
A slim majority of economists, 30 of 57, in an Oct. 21-29 Reuters poll said the RBI will cut the repo rate by 25 basis points to 6.25% at the conclusion of its Dec. 4-6 meeting. The remaining 27 forecast no change. Miguel Chanco, an economist at Pantheon, expects a December cut from the Monetary Policy Committee as inflation remains “manageable”. “Our baseline view is predicated on the next GDP report due in late November falling well short of the committee’s unusually rosy forecasts,” said Chanco.
While India is expected to remain the fastest-growing big economy, growth was forecast to taper off slightly to 6.9% this fiscal year and 6.7% in the next from 8.2% in fiscal 2023/24, lower than the RBI’s projections of 7.2% and 7.1%.
“I don’t think the fact economic growth in India is faster than most major emerging markets is a barrier to some monetary policy easing…It’s one of the least-developed major emerging markets on a per capita basis,” Chanco said.
“What matters for policy is the direction of travel and it’s clear from most economic indicators activity is losing momentum.”
However, with inflation predicted to stay above the central bank’s 4% medium-term target until early 2026, there was little room for the RBI to cut rates much more.
Poll medians through the end of next year showed the RBI cutting rates only once more after December. Of those who expect a move in December, a strong majority forecast a follow-up cut in February.
But there is no majority for a second 25 bps cut until April-June, and that is based on a smaller sample of economists.
Other central banks like the U.S. Federal Reserve and the European Central Bank have already cut rates by at least 50 bps.
With the MPC, it’s still not clear they’re even ready to deliver their first cut.
“Monetary policymakers have been stressing their vigilance over volatile food prices and their feed-through to the core elements of the consumer basket, so it is likely the bank will wait for longer to rest assured inflation dynamics are under control,” said Alexandra Hermann, economist at Oxford Economics.
“The risk for a rate cut to be delivered as soon as December has increased, especially if Q3 (July-September) GDP growth numbers surprise to the downside. Still, we believe the RBI is in no immediate hurry and will wait until its first meeting in 2025 to loosen monetary policy settings.”