India: Central Bank leaves rates unchanged in August
At its meeting on 8 August, the Central Bank decided to keep the repo rate at 6.50%. The decision matched market expectations, but was not unanimous: Two of the six members of the Central Bank’s board voted for a quarter-point cut.
The Central Bank chose not to cut interest rates as inflation rose for the first time in five months in June—rising more than a percentage point above the 4.0% target—driven primarily by a sharp increase in prices of vegetables, pulses and edible oils. Additionally, in justifying its decision to stand pat, the Central Bank also pointed to sustained momentum in domestic economic activity, supported by the boost to kharif crop sowing from a strong recent pickup in southwest monsoon rainfall.
The Central Bank also opted four to two to keep its monetary policy stance focused on the “withdrawal of accommodation”. Our Consensus is for the Central Bank to begin reducing rates in October–December, with a total of around 50 basis points of cuts by the end of FY 2024 in March 2025.
The Bank’s next meeting is due on 7–9 October.
Nomura analysts said:
“The combination of softer growth and inflation, along with increased degrees of freedom from the expected turn in the global monetary policy cycle indicates that the October meeting is live. We maintain our longstanding view that the RBI will deliver a 25bp cut, with 75bp of easing in FY25.”
HSBC’s Pranjul Bhandari and Maitreyi Das commented:
“Rains have gone from deficit to surplus over the last fortnight, and temperatures have cooled. If this sustains, food inflation could fall quickly from October onwards, opening up the space for monetary policy easing. We expect two RBI rate cuts of 25bp each in the current cycle, one in 4Q2024 and the other in 1Q2025, taking the repo rate to 6%. Given that growth is strong, we believe there will be an easing cycle, but a shallow one.”