Will RBI cut interest rate by 25bps this Friday?
What's the story
The Reserve Bank of India (RBI) is likely to consider a rate cut in its upcoming monetary policy meeting, scheduled from December 3-5. The central bank's decision will be influenced by the current economic scenario, including inflation and GDP growth. Some experts predict a potential reduction in the benchmark lending rate by 25 basis points (bps), while others suggest that it may remain unchanged due to robust GDP growth of 8.2% in Q2.
Economic indicators
Inflation trends and economic growth
The CPI-based headline retail inflation has remained below the government's mandated lower band of 2% for two consecutive months. This trend could support a rate cut. However, some experts believe that the RBI may maintain its stance on interest rates, given that economic growth has improved due to fiscal consolidation and targeted public investment. Reforms like GST rate cuts have also contributed to this recovery.
Rate adjustments
RBI's rate-easing cycle and future projections
Since February last year, the RBI has been on a rate-easing cycle, reducing the repo rate by a total of 100bps to 5.5%. However, it paused this reduction in August. A report from HDFC Bank noted that "this year, the story has been about growth overshooting and inflation undershooting." It added that "the upcoming RBI rate decision remains a close call," but there is still room for another 25bps cut in light of growth risks and low inflation expectations.
Statement
What did Crisil say?
Crisil's Chief Economist Dharmakirti Joshi noted that food inflation has been the main contributor to headline inflation falling below the RBI's target range. He said core inflation stood at 2.6% in October, aided by GST cuts. Joshi expects a 25bps cut in the repo rate next month, citing a significant decline in retail inflation as a reason for this adjustment despite robust growth.