Foreign banks and brokerages bet on RBI’s mild easing from December

Foreign banks and brokerages expect the Reserve Bank of India (RBI) to embark on a ‘shallow rate cutting cycle’ from December 2024, with an aggregate 50 basis points in easing. Most of them expect RBI to go in for a 25 basis points rate cut in December, followed by another one in February 2025, taking the policy rate to 6 per cent from 6.5 per cent now. 

Reserve Bank of India (RBI) has kept the policy rates unchanged since February 2023 at 6.5 per cent. 

HSBC Global Research View 

“We believe rate cuts will begin in the next meeting, we expect 50 basis points in rate cuts over December and February, taking the repo rate to 6 per cent”, Pranjul Bhandari, Chief Economist, India and Indonesia, HSBC Global Research said in a research note. 

At its recent monetary policy review meeting on October 7-9, RBI MPC kept the policy rate unchanged at 6.5 per cent, but changed its stance from ‘withdrawal of accommodation’ to ‘neutral’. Even as the RBI highlighted upside inflation risks, the Monetary Policy Report (MPR) unveiled a 4.1 per cent inflation projection for FY26 (i.e one year ahead inflation). ”Given the RBI is driven by future inflation expectations, this is another reason why we think a rate cut is coming up in December,” Bhandari said. 

Goldman Sachs View 

Santanu Sengupta, Chief Economist, Goldman Sachs India, said that headline inflation, going forward, is expected to remain around RBI’s target of 4 per cent year-on-year in Q3 and Q4 FY25 on the back of easing food inflation, which, along with a moderation in GDP growth, should open up room for monetary policy easing by the central bank. “We continue to expect a shallow easing cycle of total 50 basis points rate cuts from the RBI, with 25 basis points each in December 2024 and February 2025 meeting,” Sengupta said. 

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Even as the RBI remains optimistic on growth, the slight easing of inflation forecasts along with the shift of stance to “neutral” indicates to Goldman Sachs Economics Research that the RBI is likely creating space for a pivot towards monetary policy easing, Sengupta added. 

At the recent MPC meeting, RBI continued to be upbeat on growth and kept their forecast for FY25 unchanged at 7.2 per cent year-on-year. This is much higher than Goldman Sachs Economics Research’s muted growth expectations of 6.5 per cent year-on-year and recent moderation in high frequency indicators. 

RBI has also, at the recent MPC meeting, lowered their inflation forecast marginally by 10 basis points to 4.5 per cent year-on-year. RBI Governor Shaktikanta Das had noted adverse weather-related shocks and an escalation in the ongoing geopolitical conflicts as upside risks to the RBI inflation forecast. 

RBI Governor Das had highlighted that headline CPI inflation is expected to ease by Q4FY25, on easing food inflation, on the back of robust crop production. 

Morgan Stanley Research View 

Morgan Stanley Research expects RBI to pivot to a shallow rate easing cycle from February 2025 meeting, as inflation outlook turns benign. “Beyond the near-term volatility driven by base effect (September/October CPI to be 4.8-5 per cent) we expect CPI inflation to track at 4.2 per cent in CY25. In our view, this opens up room for a shallow easing cycle (cumulative 50bp), which we expect to commence from the February meeting”, Upasana Chachra, Chief Economist, Morgan Stanley Research, said in a research note. 

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Risks of a faster-than-anticipated pivot in monetary policy stem from a slower-than-expected trend in growth or faster-than-expected moderation in headline inflation close to the 4 per cent target, Chachra added. 

DBS Group View 

Radhika Rao, Executive Director and Chief Economist, DBS Group Research, said, “We retain our view for rate cuts to start with a 25 basis points reduction in December 2024, assigning a 70 per cent probability, with 100 basis points cuts over the course of Calendar Year 2025. There is a smaller 30 per cent likelihood that the start of cuts might be pushed to February 2025 if policymakers see the need for more date to confirm their dovish bias.” The door remains open for a rate cut within 2024, she noted. 

On oil prices, Rao said in a research note that it is a key wildcard. “With the geopolitical tensions in the oil-rich Middle East intensifying in recent weeks, the path for crude oil prices remains uncertain”, she said.