Even though the Reserve Bank-led MPC paused for the second time in a row, analysts are unanimous in ruling out any rate cut through the course of the year, given the stress that the governor has placed on ensuring durable inflation.
At the same time, all of them expect the pause on the repo rate at 6.50% to continue until the December review and see the first repo rate cut in February 2024.
While the RBI governor is upbeat on growth and recognises the recent easing pressure on inflation, he is more cautious about the future trajectory of inflation, emphasising that it remains committed to anchoring inflation close to 4%. Abheek Barua, the chief economist at HDFC Bank, said
"We think that this resolve to do 'whatever is necessary' to bring inflation down on a sustained basis to the median target is likely to push forward rate cut expectations, which sections of the market had started pricing in for as early as October 2023."
"That said, it does not mean that the RBI will keep rates on hold until inflation actually reaches 4%. We think once the inflation uncertainty moderates and a path towards the 4% target is visible, the RBI could start its rate cut cycle if growth conditions warrant it. But we do not see this happening before Q1 of 2024," Barua said.
Echoing similar views, Dharmakirti Joshi, the chief economist at Crisil Ratings, said he too expects the RBI to maintain the status quo on rates this fiscal and initiate cuts in the March quarter of 2024 only.
"We expect the MPC to continue its pause on policy rates in the next meeting, too, as it evaluates the inflation trajectory. Retail inflation has been within the RBI's tolerance band for the past two months. That said, risks from El Nino and an uneven monsoon can shore up food prices. The RBI will likely initiate rate cuts in March 2024 as growth moderates," Joshi said.
Tanvee Gupta-Jain, the UBS India economist, expects the RBI to deliver the first rate cut in the February 2024 meeting. Earlier, she was expecting this to happen in the December 2023 review.
According to her, the likely fall in inflation to 5.1% in FY24 from 6.7% in FY23 has more to do with slowing domestic demand, a correction in global commodity prices, the lagged impact of monetary tightening, improvements in global supply chains, and the base effect.
That aside, El Nino risks are also rising.
"Given all these, we now expect the RBI to cut the repo rate in February 2024 as against our earlier view of December 2023. We also maintain our view that it will be difficult for the RBI to cut rates before the Fed considering the interest rate differential between the repo rate and the effective Fed fund rate (142 bps currently) is the lowest since June 2006," Gupta-Jain said.
Radhika Rao, the senior economist at DBS Group, also supports a long pause and easing to begin next year.
"Net-net, we expect RBI to maintain the status quo on rates in the next few meetings. We expect it to initiate cuts in the March quarter of 2024 as growth slows and puts a downside on inflation," Rao said.
Rahul Bajoria of Barclays said since the RBI expects inflation to remain within its target range for the rest of the fiscal year and with growth faring reasonably well, the RBI will stay on hold through the rest of FY24.
However, he also feels that the second straight pause suggests that the RBI has reached this cycle's peak repo rate. However, we do not believe in a policy pivot where the RBI starts signalling cuts. As such, we see the RBI remaining on hold through FY24 and a window for rate cuts opening in Q1 of FY25.
Morgan Stanley India economists Upasana Chachra and Bani Gambhir also expect the rates to remain unchanged in 2023 and the first of a shallow rate cut cycle to begin in Q1 of 2024.
"We expect rates to remain unchanged until December 2023, and we retain our view of a shallow rate cut cycle from Q1 of 2024," they said.
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