The Reserve Bank of India (RBI) has opted to maintain the repo rate unchanged for the seventh consecutive time this month. Crisil, a rating agency, now anticipates the commencement of a rate cut cycle from mid-2024.
The repo rate represents the interest rate at which the RBI lends to other banks. In line with expectations, the RBI has kept the policy repo rate steady at 6.50 per cent, marking the seventh consecutive maintenance of this rate.
“We anticipate the RBI to initiate rate cuts in mid-2024,” stated Crisil in a report, emphasizing that weather conditions and crude oil prices are crucial factors to monitor.
“Food, which was a significant contributor to inflation last year, may see relief if the monsoon returns to normalcy this year, as early weather forecasts indicate,” the report added.
Given the uneven inflation trends, the RBI’s monetary policy committee is awaiting clearer indications of easing towards the 4 per cent inflation target. The robust domestic growth momentum has provided room for such actions.
Although retail inflation in India falls within RBI’s two-six per cent comfort level, it exceeds the ideal 4 per cent scenario, standing at 4.85 per cent in March. Despite inflation concerns worldwide, India has managed to navigate its inflation trajectory quite effectively.
With the exception of recent pauses, the RBI has raised the repo rate by 250 basis points cumulatively to 6.5 per cent since May 2022 in its efforts to combat inflation.
Increasing interest rates is a monetary policy measure that typically curbs demand in the economy, thereby aiding in the decline of the inflation rate.
Regarding inflation, Crisil anticipates consumer price index (CPI)-linked inflation to ease to 4.5 per cent in the current fiscal year 2024-25 from the estimated 5.5 per cent of the previous year.
“A normal monsoon and improved farm output should contribute to moderating inflation this fiscal year. A non-inflationary budget focusing on asset creation rather than direct cash support is favorable for core inflation,” the report highlighted.
Meanwhile, the RBI has maintained its inflation projection for 2024-25 at 4.5 per cent, with projections of 4.9 per cent for Q1, 3.8 per cent for Q2, 4.6 per cent for Q3, and 4.5 per cent for Q4. However, it acknowledged that the inflation outlook will largely be influenced by uncertainties surrounding food prices, including indications of a normal monsoon alongside an increase in incidents of climate shocks.
