SBI Research anticipates rate cut cycle to begin from October 2024

08 Apr 2024 Evaluate

SBI Research, in a report, is anticipating the rate cut cycle to begin from October 2024, As the Reserve Bank of India (RBI) maintained the status quo in repo rate for the seventh time this week. The repo rate is the rate of interest at which RBI lends to other banks. Along expected lines, RBI kept the policy repo rate unchanged at 6.50 per cent, the seventh time in a row. The central bank also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target of 4 per cent, while supporting economic growth.

RBI retained its inflation projection for 2024-25 at 4.5 per cent with Q1 at 4.9 per cent, Q2 at 3.8 per cent, Q3 at 4.6 per cent, and Q4 at 4.5 per cent. However, it noted that the outlook for inflation will largely be shaped by food price uncertainties (indications of a normal monsoon on one side while increasing incidence of climate shocks on other side). As per the report, ‘The good thing is however, that with 4 per cent inflation target in FY26, the RBI is possibly guiding the market with a prolonged rate cut cycle’. It argued ‘Possibly with more than a couple of rate cuts. We expect a series of rate cuts beginning October 2024, followed by another in December 2024 and possibly in February 2025. The stance change can happen in October itself’.

Coming to real GDP growth projection for 2024-25, it has been retained at 7.0 per cent (Q1: 7.1per cent, Q2: 6.9 per cent, Q3: 7.0 per cent, and Q4: 7.0 per cent) with risks evenly balanced. While agriculture may be supported by the expected normal monsoon in the best-case scenario, manufacturing is expected to maintain its momentum on the back of sustained profitability. Inflation has been a concern for many countries, including advanced economies, but India has largely managed to steer its inflation trajectory quite well. Barring the latest pauses, the RBI raised the repo rate by 250 basis points cumulatively to 6.5 per cent since May 2022 in the fight against inflation. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.

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