RBI likely To Not Change Interest Rate At Least Until July: Report

India's economy expanded by an impressive 8.4 per cent in the fourth quarter of 2023, the fastest among major economies

The Reserve Bank of India (RBI) will keep interest rates unchanged until at least July, a bit longer than the US central bank is expected to do so, based on strong growth and still-elevated inflation, states a report by Reuters, which polled economists.

According to the report, India's economy expanded by an impressive 8.4 per cent in the fourth quarter of 2023, the fastest among major economies. Inflation, which remains close to the upper band of the central bank's 2 per cent to 6 per cent target, does not indicate an impending rate cut.

Predictions regarding the timing of the first-rate cut were divided among economists. While nine out of 52 suggested the next quarter, 24 opted for the third quarter, 17 projected the fourth quarter, and the remaining foresaw it later. Median forecasts indicate a rate of 6.25 per cent by the end of September and 6.00 per cent by year-end.

Alexandra Hermann, a lead economist at Oxford Economics, said, "The combination of headline inflation remaining above 5 per cent and the strong Q4 GDP figures will likely leave Monetary Policy Committee (MPC) members cautious about cutting rates too soon." "While the year-long downward trend in core inflation will be seen as encouraging, MPC members will likely not deem this sufficient and rather err of caution, waiting until the headline numbers are on a clearer downward path towards the 4 per cent mid-point target."

Inflation To Dip To 4.00 Per Cent In Q3

Inflation, which was 5.09 per cent in February, will fall to 4.00 per cent in the third quarter before rising, poll medians showed. Price increases were expected to average 5.40 per cent and 4.60 per cent, respectively, in the current and next fiscal years. Although growth forecasts indicate a decline to 6.6 per cent in the next fiscal year from the current fiscal year's 7.6 per cent, it still outpaces predictions made just a month earlier for the current fiscal year, which were at 7.0 per cent. India's projected growth continues to lead among major economies.

That would provide less incentive for the RBI to ease interest rates before its major peers, particularly the Federal Reserve. The US central bank is currently expected to deliver its first cut in June, a separate Reuters poll showed.

These growth projections imply less incentive for the RBI to initiate interest rate cuts before its global counterparts, particularly the Federal Reserve. The US central bank is expected to implement its first cut in June, as indicated by a separate Reuters poll, although there are growing risks for a delay until later in the year.

Aditi Gupta, an economist at the Bank of Baroda, noted, "While the Fed has already indicated policy rates are likely to be reduced in the coming months, the growth and inflation dynamics in India suggests the RBI may just keep rates elevated for longer." "In any case, the Fed is likely to cut interest rates much more than the RBI, which will ensure the interest rate differential settles somewhere close to the historical trend."