February rate cut hopes gain steam

Rating firms and economists expect the Reserve Bank of India (RBI) to kick off a rate-cut cycle at its next monetary policy review in February 2025, following a change of guard at the central bank’s helm amid moderating growth momentum.

The ‘weaker than expected’ second quarter GDP growth of 5.4% has infused some downside risks to S&P Global Ratings’ 6.8% growth forecast for 2024-25, the firm said on Tuesday. In late November, the agency had pared its growth forecast for 2025-26 and 2026-27 by 0.2 percentage points to 6.7% and 6.8%, respectively.

The rating major had flagged high interest rates and a lower fiscal impulse as factors tempering urban demand. S&P Global said it only expects one interest rate cut of 25 basis points from the Reserve Bank of India in this fiscal year, blaming “persistent food inflation” for the delay in rate cuts. 1 basis point (bp) equals 0.01%

Vishrut Rana, economist at S&P Global Ratings, said the growth slump in the July to September quarter, was owing to a slower fiscal impulse and pockets of weakness such as the urban middle class which held back manufacturing growth, and put “some downside risk to our forecast of 6.8% growth for fiscal 2024-2025”.

Nomura economists in a note titled ‘Another Finance Ministry insider takes helm at the RBI’ said the appointment of Revenue Secretary Sanjay Malhotra as central bank governor clears the path for “more and urgent easing” of the monetary policy.

“With the new RBI Governor from the MOF and with fresh thinking at hand, a rate cut at the February MPC [Monetary Policy Committee] meeting is now likely cemented (and also warranted, in our view),” said Nomura, which has said India is in the midst of a cyclical slowdown.

With RBI Deputy Governor Michael Patra’s term also ending on January 15, the MPC will have a “new look and feel” and “there is some possibility of a bigger 50bp catch-up move upfront”. “For now, we pencil in a 25bp cut in February and expect 100bp in total cuts to a terminal rate of 5.5% by end-2025,” the report concluded.

“Traditionally volatile and hard to predict, food inflation has become even more capricious lately. The RBI cannot ignore food inflation when considering rate cuts. Food items make up nearly 46% of the inflation basket and persistently high food inflation raises inflationary expectations,” S&P Global said.