Economists say that there is a possibility of cut in interest rates only after the first quarter of financial year 2025.

Mumbai :Following the tight policy stance of the Reserve Bank of India, economists are reducing their expectations of a rate cut beyond the first quarter of fiscal 2025.

In his latest policy last week, RBI Governor Shaktikanta Das clarified that the central bank’s inflation target is 4%, and not 2 to 6%. According to RBI estimates, inflation is expected to average 4.5% in FY 2025. In fact the RBI expects inflation to fall below 4% to a range of 3.8-5.2% in the next financial year, if the monsoon remains normal and there are no further policy shocks.

“If inflation is at 4% or below 4% on a sustainable basis, a rethink may be required. But not at the moment,” Das said during the press conference after the monetary policy meeting.

Economists now expect the RBI to cut rates only in the second half of FY2025, when inflation may soften closer to the 4% target.

“We are pushing back the first rate cut from February to April, while maintaining our forecast of a 100 basis point (bps) cut in 2024, taking the policy repo rate to 5.5%,” Nomura said in a report. ” ,

According to Quantico Research, “RBI remains cautious as market participants’ long-term inflation expectations remain subdued with 5Y and 10Y forward average inflation remaining at 4.9% and 4.5% respectively despite accelerated monetary tightening from April 22. The 4% inflation target and emphasis on liquidity calibration have been chosen as a means of discouraging expectations of premature monetary easing.”

The 1-year Overnight Index Swap (OIS) is currently at 7.06%, indicating no rate action over the next 1 year and tight liquidity conditions. OIS are interest rate derivative products that move according to expectations of the rate trajectory and are viewed as clear signals of future policy rate actions.

“The RBI’s response action so far has been in line with our view and the latest decision should continue to dampen any expectations of a deeper adjustment in the next financial year. “Current pricing in the swap markets is very much aligned with this outlook, with implicit pricing of a mix of rate increases and tighter liquidity conditions,” ICICI Securities Primary Dealership said in a note.

Earlier, the Federal Reserve had kept its key interest rate steady and indicated it would remain high for longer than expected.

Headline inflation, which had risen in July due to rising prices of tomatoes and other vegetables, moderated partially in August and is expected to decline further in September due to softening of these prices. According to the RBI, however, the overall inflation outlook remains unclear due to decline in kharif sowing for key crops like pulses and oilseeds, low reservoir levels and uncertainties from volatile global food and energy prices.

“Our macro outlook envisages a synchronized global growth slowdown, a slowdown in India’s domestic demand and a sustained decline in core inflation to 4.5% in the coming months. Against this backdrop, we expect the policy focus to gradually shift from inflation control to supporting growth, as we expect the one-year-ahead real rate to rise closer to 2% early next year ,” a report from Nomura said.

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