The Reserve Bank of India’s (RBI) policy meeting is scheduled to commence tomorrow, with SBI Research indicating that rate cuts might only be considered in the third quarter of fiscal year 2025 (Q3FY25). According to a report by SBI Research, historical trends suggest that interest rates in emerging economies respond with a lag of two months to rate changes in developed economies such as the US and the UK.
SBI Research predicts that the RBI will likely maintain the policy stance as ‘withdrawal of accommodation,’ with the first rate cut potentially occurring in Q3FY25. Furthermore, it anticipates that the rate-cut cycle could be shallow.
However, SBI Research emphasizes that India differs from the strong evidence indicating that central bank rate actions in emerging economies are influenced by rate actions in advanced economies.
The Monetary Policy Committee (MPC) of the RBI is scheduled to convene for a three-day meeting starting on April 3 and concluding on April 5.
SBI Research suggests that the shift in rate cuts could be a prolonged journey for markets. It notes that Federal Reserve Chair Powell’s recent remarks tempered market expectations for an early pivot by expressing the Fed’s preference for further progress on the price front, despite a favorable PCE reading.
Regarding domestic inflation, SBI Research observes that it is currently driven by food price dynamics while fuel prices remain moderate. The trend is expected to persist, with evolving food prices likely to continue influencing domestic inflation.
Core CPI has declined to a 52-month low of 3.37 percent, according to SBI’s analysis.
Looking ahead, SBI Research forecasts that inflation will decline until July 2024 but increase thereafter, peaking at 5.4 percent in September 2024 before decelerating. For the entire fiscal year 2025, CPI inflation is projected to average 4.5 percent, compared to 5.4 percent in FY24.
