Anticipated RBI Rate Reduction in February Driven by Decreasing Domestic Inflation: Crisil Analysis
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New Delhi, Dec 7 (NationPress) The circumstances are expected to become favorable for rate reductions by the Reserve Bank of India (RBI), with the initial cut anticipated in February, primarily fueled by a decrease in domestic inflation, as outlined in a recent report.
Inflation is projected to decline towards the end of this fiscal year, owing to robust agricultural production. As the rabi or winter crop enters the market, vegetable prices are likely to experience a significant correction.
According to the commentary from CRISIL Market Intelligence and Analytics, a subsidiary of S&P Global, “The reduction in food inflation, paired with mild non-food inflation, is expected to lower headline CPI inflation.”
During its recent review meeting, the RBI’s Monetary Policy Committee (MPC) maintained the repo rate at 6.5 percent and upheld a ‘neutral’ stance. The escalation in headline inflation over the last three months has prevented any rate cuts.
While significant global central banks have initiated rate reductions, market fluctuations have surged following the US elections. The US Federal Reserve and the European Central Bank have each reduced rates by 75 basis points in 2024.
The future trajectory of rate reductions by the Fed remains uncertain, particularly as incoming President Donald Trump has indicated a potential increase in tariffs, which could exacerbate inflationary pressures.
S&P Global anticipates fewer rate cuts from the Fed in 2025 compared to previous projections made three months ago. Overall, the global atmosphere appears conducive for pursuing rate cuts.
In India, domestic growth is nearing its pre-pandemic decadal average this fiscal year, following an impressive 8.2 percent growth last year.
The report suggests that the cumulative reduction in the forthcoming rate-cutting cycle will be less than the 250 bps increase since May 2022, as domestic growth momentum is expected to remain robust and the global rate cut cycle is also predicted to be shallower.
A reduction in the cash reserve ratio (CRR) will promptly enhance liquidity in the banking sector. The RBI has projected a Rs 1.16 lakh crore increase in primary liquidity as a result of this adjustment.
The MPC’s neutral stance allows it to adjust rates in upcoming policy meetings. Currently, it has utilized the CRR tool to bolster growth by enhancing systemic liquidity, as reported.
