Bankers, economists expect RBI to cut key interest rate in second half of FY25

New Delhi: With RBI holding the benchmark interest rate on Friday, bankers and economists said the first monetary policy committee meet post general elections has instilled confidence and stability in the market and they expect the central bank to slash repo rate in the second half of FY25.

The Reserve Bank of India (RBI) left its key interest rate unchanged at 6.5 per cent as expected, keeping the focus on inflation amid robust economic growth that is likely to provide the new Modi government headroom for manoeuvring reforms.

The central bank also retained its projection for retail inflation at 4.5 per cent for the current fiscal assuming a normal monsoon, while emphasising that uncertainties related to food price outlook warrant a close monitoring.

Dharmakirti Joshi, Chief Economist, CRISIL Ltd said, "We now see the RBI cutting rates starting October and have lowered our expectation to two rate cuts against three foreseen earlier". According to Ajay Kumar Srivastava, Managing Director & CEO, Indian Overseas Bank, the RBI's decision to continue its focus on "withdrawal of accommodation" reflects a balanced approach to sustain economic growth while keeping inflation in check.

RBI's decision on e-mandates for recurring payments to be extended to fastags, introduction of auto replenishment of UPI-like wallet, and establishment of a digital payments intelligence platform, is all set to promote a resilient banking sector, he added.

Rajiv Sabharwal, MD and CEO, Tata Capital said, "The first MPC post-election has instilled confidence and stability in the market. With steady repo rate at 6.5 per cent, RBI is hinting towards balancing growth and inflation". According to Achala Jethmalani, Economist, RBL Bank, given India’s growth-inflation dynamics, a rate cut is expected in Q4FY25 with a change in policy stance by December 2024. The progress of southwest monsoon and the July budget will be critical inputs in the August MPC policy.

Aditi Nayar, Chief Economist, Head of Research and Outreach at ICRA Ltd said, "The status quo from the MPC was on expected lines, with only the voting change on the stance to 4:2 posing a surprise. Despite this, the 10 year G-sec yield remained above 7 per cent, with the actual start to the rate cut cycle appearing distant". Madan Sabnavis, Chief Economist, Bank of Baroda said while inflation is to average 4.5 per cent for the year, there is a concern on food inflation, especially in the wake of the heatwave which has increased prices of horticulture products. But with growth being secure, it gives the RBI room to not commence on rate cuts at this point of time.

"Our view is that October can be the time when a rate cut can be considered but will be fully data-driven. A clarification made by the Governor on decisions being based on local conditions is significant because often markets tend to react to Fed statements as they are interpreted as having impact on the RBI decision on repo rate", he added.

Rohit Garg, Co-Founder& CEO, Olyv (formerly SmartCoin) said, this decision underscores the central bank's commitment to fostering stability amidst robust economic growth and a slight easing of inflation to 4.83 per cent.

"The Indian government's pursuit of reducing the fiscal deficit, supported by RBI dividends, further reinforces economic stability. Despite revising the GDP forecast for FY25 to 7.2 per cent, the RBI opted to keep the consumer inflation forecast unchanged", he added.

Anantharam Varayur, Co Founder, Manasum Senior Living said the RBI's decision is particularly encouraging for the senior living residential projects sector.

"The unchanged repo rate provides much-needed stability, ensuring that borrowing costs for developers remain steady. This predictability in interest rates could attract more investment into senior living projects, as developers can plan their finances more effectively", Varayur added.

The Monetary Policy Committee, consisting of three RBI and an equal number of external members, kept the repo rate unchanged at 6.50 per cent for an eighth straight policy meeting and stuck to its relatively hawkish stance of "withdrawal of accommodation".

However, there were signs of a more divided policy committee, with one additional member voting for a softening in stance as well as policy direction. Two external members, Ashima Goyal and Jayanth Varma, voted for a cut, compared to one in the previous meeting.

The decision comes just days ahead of Narendra Modi assuming the office of Prime Minister for the third straight time but with a smaller-than-expected election victory that forced his party BJP to share power in a coalition government.