Policy Pivot: When Will RBI Cut Rate? Here's What Brokerages Expect

The Reserve Bank of India maintained its key policy rate unchanged in its recent MPC meeting, holding the repo rate at 6.5% for the 11th consecutive time. This decision was largely in line with the market expectations.

The monetary policy stance remains “neutral,” with the central bank focusing on balancing inflation control with economic growth support. Brokerages, however, have varied expectations for the future, with some predicting rate cuts in the coming months while others remain cautious about the growth trajectory.

The GDP growth projection for financial year 2025 was revised down to 6.6%, a slight dip from the earlier 7.2%. The second quarter of financial year 25 saw unexpected weakness, with GDP growth slowing to 5.4%.

Morgan Stanley expects a gradual easing cycle to commence from the first quarter of 2025. The brokerage believes that softening inflation and stable food prices will provide the RBI the room to lower rates. Morgan Stanley projects two rate cuts of 25 basis points each, with the first cut anticipated in February 2025.

The brokerage’s outlook is grounded in a better inflation outlook, supported by a robust rabi crop and improving rural demand. However, the firm also stressed that while economic growth is expected to pick up in the second half of financial year 2025, they will closely monitor high-frequency data to assess any risks to the recovery. A more significant easing is not expected until mid-2025, reflecting a cautious stance in response to ongoing economic uncertainties.

Nomura expressed disappointment with the RBI’s decision to keep rates on hold, emphasising that a more aggressive response to the economic slowdown is needed. The brokerage believes the RBI is underestimating the extent of the growth slowdown, with risks of deeper rate cuts looming if growth continues to falter.

Nomura forecasts that the RBI will need to cut rates by 100 basis points over the next year, with the first reduction of 50 basis points potentially happening as early as February 2025.

The brokerage is particularly concerned about the growth outlook, which it believes may weaken further if inflationary pressures continue to ease slowly. While they acknowledge the RBI’s concern about food inflation and external risks, they see greater downside risks to GDP growth forecasts, which could necessitate a more aggressive policy response.

Goldman Sachs, while maintaining a neutral stance on the RBI’s recent decision, believes that the central bank will likely start easing rates gradually in the first half of 2025. The brokerage has a more optimistic outlook on inflation and growth, expecting the RBI to lower the repo rate by 50 basis points in total by the end of financial year 2025, with 25 basis points of cuts in both February and April 2025.

Goldman Sachs highlights that while food inflation is expected to ease, risks remain from external factors such as rising international prices for edible oils. The brokerage also expects the RBI to remain proactive in managing liquidity, especially after the recent CRR cut, which is expected to infuse INR 1.2 lakh crore into the banking system. This will likely keep inter-bank rates closer to the repo rate in the near term.

Jefferies also expects the RBI to take a more measured approach to monetary policy, focusing on stabilising inflation while supporting economic growth. The brokerage projects a rate cut of 50 basis points in 2025, with the possibility of two smaller cuts, each of 25 basis points, in February and April 2025.

Jefferies highlights that the RBI’s GDP growth forecast for financial year 2025 has been lowered to 6.6%, still indicating moderate growth in the second half of financial year 2025. The brokerage also notes the impact of weaker-than-expected industrial sector performance in Q2 financial year 2025, but remains optimistic about recovery driven by rural demand and government spending. Inflation, meanwhile, is expected to remain close to the RBI’s 4% target, supported by a good sowing of both summer and winter crops.

HSBC projects that the RBI will initiate shallow rate cuts in early 2025, estimating a 50 basis point reduction in February and April, which would bring the repo rate down to 6%. They foresee the RBI continuing to deploy liquidity instruments to bolster growth, especially as inflation pressures ease over time.

A key factor in HSBC’s outlook is the cautious approach towards growth and inflation, given the weaker-than-expected growth data and persistent inflationary pressures. However, HSBC believes the RBI will likely cut rates only after clearer signs of inflationary relief.

UBS has a more optimistic outlook on rate cuts, predicting that the RBI will begin easing policy rates in February 2025. UBS projects that CPI inflation, which peaked at 6.2% year on year in October 2024, will soften towards 4.5% by mid-2025 due to easing food prices, lower energy costs, and weaker growth. Despite weaker FX conditions, UBS expects the RBI to reduce the policy rate by 75 basis points starting in February 2025.

UBS believes a recovery in domestic activity, spurred by strong festive demand and improved rural activity, will help stabilise growth in 2025. They anticipate that the RBI will keep liquidity measures in place, especially given the expected slowdown in global trade and geopolitical uncertainties that may pose risks to the domestic economy.