RBI MPC: SBI says rate cuts might take place only in Q3 FY25

Ahead of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee meeting from April 3-5, State Bank of India, in its research report, has stated that rate cuts are not likely in the upcoming MPC. According to the SBI, RBI is expected to cut rates only in the third quarter of FY25. 

“Strong evidence of emerging economy central bank rate actions are predicated by advanced economy central bank rate actions…India is an exception…first RBI cut in Q3FY25…such rate cut cycle likely to be shallow,” stated SBI in its report, adding that the stance should continue to be withdrawal of accommodation. 

This comes after the US Federal Reserve left the benchmark overnight interest rate in the 5.25-5.50% range and held onto their outlook for three cuts in borrowing costs this year. 

The SBI report added that inflation is expected to decline till July, but increase after that to reach a peak of 5.4 per cent in September, followed by a deceleration. For the whole FY25, CPI inflation is likely to average to 4.5 per cent. 

RBI had kept repo rates unchanged at 6.5 per cent in the February MPC meeting. It also decided to remain focussed on ‘withdrawal of accommodation’. Since the April monetary policy in 2023, the RBI has kept the repo rate unchanged at 6.5 per cent. 

“With moderate fuel prices, inflation is currently being driven by food price dynamics. CPI inflation is mostly driven by good inflation. Looking ahead, evolving food prices will determine domestic inflation. CPI inflation is expected to remain slightly above 5.0% in the remaining one month of FY24,” the report added. 

Liquidity deficit has declined since the last policy in February, stated SBI. “Net LAF has remained in the deficit mode since mid-Sep’23, with an average of Rs 0.97 lakh crore post Feb’24 policy. Government surplus cash balances have decreased to an average of Rs 1.18 lakh crore post Feb’24 policy. Durable/core liquidity surplus has come down to Rs 1.87 lakh crore,” it said. 

On the banking front, SBI expects deposits and credit to grow 14.5-15 per cent and 16.0-16.5 per cent respectively in FY25. 

“India has beaten rest of the Asian markets by attracting the highest foreign funds flow in March, defying geopolitical crises and concerns that the higher interest rate regime will continue for some more time. Equity inflows comprises of ~70 per cent of total inflows as of now but going forward we believe the debt inflows can pick up big time as passive investments in bonds under FAR route start trickling for both JP Morgan as also Bloomberg index investors…,” it said.