Though the growth outlook is steady, inclement weather conditions and the current heatwave across the country pose key risks to the inflation outlook. Economists believe that all eyes are on monsoon and inflation and don’t see rate cuts anytime soon.
Will RBI blink before the US Fed and cut rates this year? While the robust GDP numbers did raise the hope of an earlier than expected rate cut, the sticky inflation situation seems to put a spanner in the works. According to Elara Capital, sticky food inflation due to uncertain weather conditions remain key risks. According to them, the Reserve Bank of India may hold policy repo rate through 2024 and the first of the rates cuts might be seen in early 2025 as against earlier expectation of Q3FY25 or later half of 2024
Growth numbers indicate to urgency to cut rates
In a detailed report, economists at Elara Capital outlined that, “With India’s GDP growth projected at a robust 7% for FY25E, the RBI has enough policy room to hold rates at 6.5%. India’s credit growth grew at a robust 16% YoY in FY24, even when weighted average lending rate remained elevated at 9.6-9.81% (Apr-Feb FY24) suggesting that the elevated repo rates are yet to hamper risk sentiments in the system.” They added that apart from this, other high frequency indicators such as PMIs, GST collections, rail freight and domestic passenger growth remain encouraging compared with the historical standards giving the RBI assurance that an immediate rate cut may not be required.
Inflation worries continue
As risks associated with growth remain at bay, they believe the RBI will be more active in addressing the inflation worries. The report states that, “on the food inflation front, we expect rising temperatures across the Indian peninsula to keep food inflation sticky. While forecast of normal monsoons is likely to keep the RBI in comfort zone, the spatial inter-temporal distribution of monsoon has been a risk. CYTD, we already have seen 68.5% of the days with above normal rainfall in January to April this year, till date.”
As such, they expect the Reserve Bank of India to stay focused on global developments more than domestic factors unless any adverse growth shocks emerge. However, they beleive the possibility of any such situation is low at present.
Source:financialexpress.com