However, the central bank may shift its policy stance to ‘neutral’, allowing flexibility to adjust based on evolving economic conditions, from the current ‘withdrawal of accommodation’, which involves gradually tightening policy to control inflation.
Sajjid Chinoy, Chief India Economist at JPMorgan, says it’s the right moment for the RBI to move towards a ‘neutral’ stance as food inflation is easing and monsoon has been favourable,
Food inflation was the primary reason for maintaining the current stance, but that situation is now evolving, he adds.
Inflation is a growing concern of the central bank as the effects of previous base declines fade, and food prices show signs of reversing.
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Samiran Chakraborty, Chief India Economist at Citi, expects a cautious approach from the central bank, as inflation risks persist.
Inflation could hover around 5% in the coming months, especially if the extended monsoon leads to an increase in vegetable prices.
While oil prices remain manageable, China’s stimulus could increase global commodity prices, particularly metals and oil, adding pressure to inflation in India.
China’s top economic planner announced a second round of stimulus measures on October 8.
RBI Governor Shaktikanta Das has consistently highlighted that any move to adjust real interest rates hinges on food inflation stabilising near the target of 4%.
While the Consumer Price Index (CPI) fell below 4% in July and August 2024, the average retail inflation from April to August stands at 4.3%, with food inflation still running above 5%.
This suggests that further easing may be contingent on a more sustained moderation in food prices.
Chetan Ahya, Chief Asia Economist at Morgan Stanley also feels the RBI will hold off on rate cuts for now as it focuses on domestic growth and inflation rather than mirroring the actions of the US Federal Reserve.
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“At this point, since our base case forecast is that inflation will be going down to about 4.5% sustainably, and growth is going to be 7% this year, it gives little room for RBI to go ahead and cut rates immediately,” Ahya stated in an interview with CNBC-TV18.
On the growth front, Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India, highlighted a slowdown in consumption-driven sectors like two-wheeler and tractor sales.
Bank credit growth has also decelerated, lagging behind deposit growth for the first time in two years.
As growth appears to be softening, he believes the RBI may opt for a more dovish stance to support the economy but is unlikely to make any immediate changes until more concrete evidence of a slowdown emerges.
Even market experts, including global equity strategist Christopher Wood of Jefferies, agree the RBI will take a cautious approach.
“We believe that RBI is not going to be aggressively cutting. The RBI is going to behave in a different way from the Fed. The RBI, in recent months, has been counter-cyclical, because they have been doing these preemptive regulatory measures as regards the banking system. So I would assume the RBI will cut rates once before the end of the year,” said Christopher Wood, global head of equity strategy at Jefferies.
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Sonal Varma of Nomura Financial Advisory and Securities, however, supports an early rate cut, arguing that 94% of the Consumer Price Index (CPI) basket is currently showing 3% inflation, with limited volatility beyond certain segments.
Although geopolitical tensions could lead to higher oil prices, India has sufficient buffers in place, with the RBI projections factoring in oil prices at $85 per barrel. This provides enough margin to avoid major domestic price hikes.
Varma believes that growth risks and the lag effect of monetary policy warrant action sooner rather than later.