RBI May Begin Shallow Rate Cut Cycle From Feb Amid Global Turmoil

Mumbai: While calls for rate cuts are growing louder with inflation decelerating in November amid concerns over slowing economic growth, economists see a small window of conventional rate cuts next year as global dynamics turn more fluid. Most expect the central bank to begin a shallow rate-cut cycle in its February 2025 policy meeting with a 25 basis points rate cut.

India’s November headline consumer price inflation (CPI) rose by a slower 5.48 per cent year on year, receding from October’s peak at 6.2 per cent. This latest print is back within the upper tolerance limit of 6 per cent but still at a distance from the central bank’s 4 per cent target. Food inflation remained high at 9 percent in November, driven by rigidity in vegetable inflation and elevation in edible oils inflation, warranting caution. On the other hand, the Index of Industrial Production (IIP) registered a marginal 3.5 per cent on-year increase in October, compared with 3.1 per cent in September. Most major industrial sectors performed better.

The RBI MPC will have November and December inflation prints and the FY26 Budget on hand by the February 2025 policy meeting. Headline inflation is expected to normalise on the passage of weather-related impact on the food basket, edging back into the 4-5 per cent range by then. Global developments remain the wildcard, with the US government due to take office in mid-January 2025. Subsequent protectionist/ inflationary policy announcements are likely to impact the dollar and US rates, by extension Asian markets including the rupee and INR market rates. The rupee slipped to a new record low this week.

Madhavi Arora, lead economist at Emkay said, “Inflation easing does not guarantee a deep linear rate cut cycle. The policy trade-offs are getting acute with a tricky and small window of conventional rate cuts as global dynamics turn more fluid.”

“Besides mounting forex pressures and increasing cost of forex intervention will need to be weighed before cutting rates ahead. We do not, for now, rule out a cut in Feb 2025 but would be more comfortable taking a firm call closer to the policy window, especially with the new MPC in order,” added Arora.

"In our view, if the headline CPI inflation eases to 5 per cent or lower by December 2024, the likelihood of a rate cut by the MPC in its February 2025 meeting would be very high. We maintain our baseline expectation of two rate cuts of 25 bps each in the awaited rate-cutting cycle,” said Aditi Nayar, Chief Economist and Head - Research & Outreach, at ICRA Limited.