Foreign banks see the window for RBI rate cuts opening only in December this year despite food price pressures likely to have peaked in July.

With the RBI still hawkish and given the increase in its near-term inflation forecasts, they see the central bank staying cautious in the next few months. 

“Amid increased comfort over growth and the bank raiding its near-term inflation forecasts, we see a window for rate cuts opening only in December 2024,” Shreya Sodhani, Regional Economist, Barclays said in a research note on latest July CPI. 

RBI policy rates unchanged

RBI Monetary Policy Committee (MOC) has kept policy rates inched for nine consecutive meetings. The last time repo rate was changed was in February 2023. 

Headline CPI inflation slowed to a five year low of 3.5 per cent in July 2024 from a level of 5.1 per cent in June 2024, dragged down by a high base, official data on Monday showed. Sequentially, however, prices rose 1.4 per cent month-on-month compared with 1.3 per cent in June, with prices rising across food and core. 

RBI rate cut

Barclays also highlighted the risk of further delay in RBI rate cut if growth remains on a strong footing or if the inflation surge is higher than expected by the central bank. 

Meanwhile, Pranjul Bhandari, Chief Economist, India and Indonesia, HSBC Global Research said, “We expect the Reserve Bank of India to deliver a total of 50 basis points in rate cuts over Q4 2024 (Oct-Dec) and Q1 2025 (Jan-Mar), taking the repo rate to 6 per cent”.

“In the first ten days of August, vegetable prices have fallen 10 per cent m-o-m as temperatures have cooled. If this were to continue for the rest of the month, food inflation in August may see its first sequential contraction in ten months. August headline inflation is currently tracking at similar levels as in July,” Bhandari said in a research note. 

Favourable outlook for food inflation

If strong rains and cooler temperatures were to continue into the next few months, food prices are likely to fall further as a new crop arrives in the market, particularly from October, she added.

On index of industrial production (IIP), Bhandari noted that some of the moderation in the June IIP (4.2 per cent y-o-y from 6.2 per cent in May) could well be payback after two months of sequential rises. “With rains picking up, temperatures cooling, and government spending picking up once again, future IIP numbers may rise up again,” she added. 

Radhika Rao, Executive Director & Senior Economist, DBS Bank said that the headline inflation’s softer start in July suggests that the RBI’s current quarter’s inflation forecast of 4.4 per cent will be undershot. The outlook for food inflation is turning favourable as monsoon tracks 6 per cent above normal alongside healthy kharif crop sowing and benign global prices, she said in a research note. 

On policy, the RBI had already signalled that July-August inflation outruns will be looked through because of the base effects, with the outlook thereafter to be given more weightage. As base effects fade, inflation is poised to head back above 4 per cent by September, Rao added. 

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