Inflation concerns: RBI likely to delay cutting interest rates till early 2025

28 November 2024

New Dehi (Reuters): The Reserve Bank of India (RBI) is set to hold interest rates on Dec 6 as a sharp rise in consumer inflation has led several economists in a Reuters poll to push back their forecasts for the first cut in the cycle by a couple of months to February.

Annual retail inflation surged past the RBI’s 6 per cent tolerance ceiling in October, driven by soaring food prices. RBI Governor Shaktikanta Das, whose term is likely to be extended, recently said any premature move to lower rates would be risky.

This was despite the RBI changing its monetary policy stance to ‘neutral’ in October and calls from top government ministers to cut interest rates to support a slowing economy.

A strong majority of economists, 62 of 67, in the Nov 18-27 Reuters poll predicted the RBI would hold its key repo rate at 6.50 per cent at the end of its Dec. 4-6 meeting. Five forecast a 25-basis-point (bp) cut.

This marked a shift from expectations in a poll conducted last month, where a slim majority of economists anticipated a cut to 6.25 per cent in December.

“If Governor Das stays on … policy loosening is not on the cards for the time being. Das has been one of the more hawkish panel members in recent months,” said Shilan Shah, deputy chief emerging markets economist at Capital Economics.

“That all said, there is growing evidence that the economy is cooling and we still think that inflation will drop back over the coming months. That will open the door for policy easing.”

Twenty-one of 48 common contributors who provided rate forecasts last month and this month pushed their expectation for the first rate cut from December to February or later.

HSBC chief India economist Pranjul Bhandari, who shifted her forecast to February, said: “In the past, the RBI used to often look through vegetable price inflation, but that is not the case anymore.”

“Back-to-back (inflation) shocks seem to have made officials distrustful of quick disinflation in vegetable prices. It may prefer to wait now, and ease… (at the) February and April meetings.”

Median forecasts in the poll showed the RBI will cut interest rates by half a point to 6 per cent by the end of June 2025, a view unchanged from last month. This is expected to be followed by a prolonged pause until at least early 2026.

Such an easing cycle would start much later and be significantly more gradual than other major central banks, including the US Federal Reserve, which is expected to cut rates again in December and by at least another 50 bps in 2025.

“If the Fed rate cut cycle is much shallower than expected due to expansionary fiscal policies and a rise in global trade tariffs, this will limit the pace of rate cuts next year for emerging market central banks,” said Gaura Sengupta, chief economist at IDFC Bank.

US President-elect Donald Trump, who will return to the White House in January, has proposed to impose blanket tariffs of at least 10 per cent on all imports.

“Conversely, there could be downside risk to our terminal rate forecast if domestic growth conditions weaken more than expected,” Sengupta said.

Growth in Asia’s third-largest economy is projected to slow to 6.8 per cent this fiscal year (FY) and 6.6 per cent next, a sharp slowdown from over 8 per cent seen in FY 2023/24.