First rate cut by RBI expected in Q3 FY25, ‘withdrawal of accommodation’ stance to remain: SBI

The State Bank of India, ahead of the June 5-7 monetary policy committee (MPC), said that the Reserve Bank of India would cut rates only in the third quarter. 

In a research paper by SBI, the lender said that strong evidence of emerging economy central bank rate actions are predicated by advanced economy central bank rate actions but India is an exception. It said that the first rate cut by RBI is expected in Q3 FY25, and that too such a rate cut cycle is likely to be shallow measures to augment liquidity.   It also said that the stance should continue to be withdrawal of accommodation in the upcoming MPC.

It highlighted that this status quo would come even as the European Central Bank is expected to embrace a rate cut of 25 bps in its June 6th meet as inflation nears its target, and due to uneven balancing of growth forecasts and tech leadership between US and EU.  

The SBI highlighted that India’s economy grew by 8.2 per cent in FY24 as compared to 7 per cent in FY23. “The 3-year moving average is highest at 8.3 per cent since FY15. Given a historical ICOR of 4.3 and gross investment rate at 33.3 per cent as per professional forecasters, 7.5 per cent growth for FY25 could be a reality!” it said. 

CPI inflation for April stood at 4.83 per cent, while core inflation was 3.22 per cent. “The CPI inflation is expected to approach the RBI tolerance band in H1 FY25,” said SBI. The report stated that CPI inflation is expected to remain close to 5 per cent till May and decline thereafter to 3 per cent in July. Inflation is expected to stay below 5 per cent beginning October till end of FY25, it added.

Net liquidity was in surplus mode from April 1 to April 19 with an average of Rs 1.1 lakh crore, then it went to deficit mode with an average of Rs 1.4 lakh crore. This is mainly due to surplus government cash balances which averaged to Rs 2.5 lakh crore in FY25 till May, the report added.