RBI poised to cut interest rate starting December: UBS report
The Reserve Bank of India's Monetary Policy Committee (MPC) is expected to initiate a reduction in interest rate from December this year, as per a report by UBS. This prediction is based on an improving domestic inflation outlook and a global trend toward monetary easing. The report titled "Five key questions for the Indian economy," suggests that the MPC may lower repo rate by 75 basis points in this cycle, up from their previous forecast of 50 basis points.
Domestic inflation outlook and global trends influence rate cut
The anticipated rate cut is influenced by an improving domestic inflation outlook, expected to be 30 basis points lower than the RBI's forecast of 4.5% for FY25. This comes amid a global trend of monetary easing, with the US Federal Reserve recently reducing its key interest rate by 50 basis points. However, Economic Affairs Secretary Ajay Seth clarified that the RBI will base its decision on what best suits the Indian economy.
RBI's MPC to meet in October
The MPC, led by RBI Governor Shaktikanta Das, is set to meet from October 7-9 to discuss the interest rate. Retail inflation, a key factor in this decision, rose slightly to 3.65% in August from 3.54% in July. Despite overall inflation being below the RBI's median target of 4%, the rate of price rise in the food basket was recorded at 5.66% for August.
Repo rate remains unchanged amid food inflation risks
In its August bi-monthly review, the RBI maintained the repo rate at 6.5% due to risks from higher food inflation. This marked the ninth consecutive MPC meeting where the decision was made to keep rate steady. The benchmark repo rate has been unchanged since February 2023. In their last meeting, four out of six MPC members voted for maintaining current rate while two external members advocated for a reduction.
