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Foreign banks anticipate a 25-basis-point rate cut by the Reserve Bank of India (RBI) in the February MPC meeting. November CPI inflation fell within the tolerance band and is expected to ease further, nearing the 4 per cent target by March 2025.

Official data released on Thursday showed headline CPI inflation softened to 5.48 per cent year-on-year in November 2024 from a 14-month high of 6.21 per cent year-on-year in October 2024. This latest print is within the tolerance band of the 2-6 per cent range (midpoint target at 4 per cent).This was also the first sequential drop seen since January 2024.

“As today’s CPI inflation print fell within the tolerance band and the tracker indicates that we are drifting closer to the 4 percent target by March 2025, we expect the RBI MPC to cut the policy repo rate by 25 basis points on February 7”,  Aastha Gudwani, India Chief Economist, Barclays, said in a research note post the November CPI announcement.

Gudwani highlighted that Barclays Research was mindful of the almost new-looking Monetary Policy Committee (MPC) in charge of this decision.

The Reserve Bank of India (RBI) MPC has held off on raising the repo rate for eleven consecutive meetings since February 2023.

Barclays Research also sees downside risks to its GDP growth forecast of 6.5 per cent year-on-year and 6.6 per cent by the RBI MPC. 

On fiscal deficit, Barclays Research expects the Finance Ministry to over-achieve its FY 2024-25 fiscal deficit target by 20 basis points to 4.7 per cent of GDP and thus sees no threat to the government’s fiscal target of 4.5 per cent of GDP for 2025-26.

Radhika Rao, Executive Director and Senior Economist, said, “We maintain our call for a 25bp cut at the February meeting, with cumulative 75bp cuts in this cycle, keeping an eye on the US dollar and dollar liquidity”.

“Based on the available high frequency numbers, December 2024 inflation is tracking ~5.5 percent, which is set to take the quarter’s average to 5.7 percent, in line with the RBI’s revised projection. We expect the 4QFY25 to average below 5 percent. While Nov’s inflation is still above the mid-point target, the forward-looking trajectory remains conducive”, Rao said in a research note. 

DBS Bank expect the FY26 Budget presentation to point to further fiscal consolidation, converging towards the -4.5 per cent deficit target, Rao added.

Global developments

Global developments remain the wildcard, with the US government due to take office in mid-January 2025. Subsequent protectionist/ inflationary policy announcements are likely to impact the dollar and US rates and, by extension, Asian markets, including the rupee and INR market rates, Rao added. The rupee slipped to a new record low this week as market participants tested the incoming Governor’s view on the currency, she said.

Anubhuti Sahay, Head, India Economic Research, Standard Chartered Bank, said “We expect a 25bps cut in repo rate in the upcoming February meeting as food inflation is likely to come lower by then. In total we expect a 50 bps cut between February and April 2025; another 50 bps is possible if growth- inflation dynamics domestically and external sector remains favourable”. 

Published on December 13, 2024