RBI holds rates in December, but first rate cut since May 2020 looms

Bank stands pat: At its meeting on 6 December, the Monetary Policy Committee of the Reserve Bank of India (RBI) voted four to two to keep its policy rate at 6.50%. The decision matched market expectations.

Worsening inflation outlook prods hold: In making its decision to hold, instead of ease, the RBI pointed to a more “adverse” inflation outlook, with inflation having exceeded expectations for the third straight month in October and rising to a 14-month high; recent heavy rains destroyed crops, stoking food prices. The RBI raised its inflation forecast for FY 2024 (the fiscal year ending April 2025) to 4.8% from 4.5% and its FY 2025 forecast to 4.6% from 4.3%. This inflationary pressure outweighed considerations relating to GDP growth, which decelerated more than expected in the most recent quarter to an almost two-year low; in particular, the Bank highlighted that it expects growth to pick up pace ahead.

Easing expected to begin in February: Though inflation is now expected to be higher than initially projected in FY 2024, it should still broadly decline in the coming months as food prices ease; this year’s strong monsoon is set to translate into a potentially record harvest in the kharif crop season, which takes place in October–December and includes staples such as rice, maize and soybeans. In addition, the economy is slowing. As a result, the vast majority of our panelists expect the RBI to begin cutting rates at its 5–7 February 2025 meeting; a total of 25 basis points of easing has been chalked in. That said, Trump’s U.S. presidency could cause our panelists to redraw their forecasts, with tariffs likely boosting the U.S. dollar and therefore making imports more expensive for India.

Panelist insight: Goldman Sachs analysts commented: “Going forward, we expect headline inflation to remain closer to the RBI's target at ~4.5% yoy in 1H CY25 on the back of easing food inflation, which, along with the softness in economic activity growth, should open up room for monetary policy easing by the RBI. We continue to expect a shallow easing cycle of total 50bp rate cuts from the RBI, with 25bp each in the February 2025 and April 2025 meetings.” ING’s Deepali Bhargava said: “We continue to expect the RBI to cut rates in February next year. First, our CPI inflation trajectory has CPI inflation falling sharply to 5.2% in December this year from 6.2% in October, driven by softer crude oil and food prices. Second, GDP growth softened sharply to 5.4% in the third quarter of 2024, much below consensus expectations of 6.5% – suggesting that a cyclical growth moderation is underway.”

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