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The Reserve Bank of India (RBI) may opt for shallow rate cuts in its upcoming Monetary Policy Committee (MPC) meeting in February 2025, says a report by Sharekhan, a capital markets company. This comes amidst a cautious global economic environment.
The report highlighted that the recent 25 basis points rate cut by the US Federal Reserve was accompanied by a more hawkish tone than expected, signaling concerns over inflation and a strong US economy. This hawkish stance has strengthened the US Dollar Index, putting additional pressure on the Indian rupee and increasing the risk of imported inflation. Given these factors, the RBI is likely to follow a similar path of shallow rate cuts instead of sharp reductions to balance growth concerns and inflationary risks. It said "The Fed is projecting stronger economy, and more inflation concerns which will lower the rate cut expectation. The RBI will also follow the path of shallow rate cut". On the domestic front, retail inflation, measured by the Consumer Price Index (CPI), moderated to 5.5 per cent in November 2024 from 6.2 per cent in the previous month. The easing of food inflation has been a key driver of this moderation. According to the RBI's recent monetary policy outlook, food inflation is expected to ease further starting from the fourth quarter of FY25. The RBI has revised its CPI inflation projection for FY25 upward to 4.8 per cent from 4.5 per cent, factoring in persistent inflationary pressures. However, the recent decline in CPI inflation and the anticipation of a continued easing trend could provide room for the central bank to consider rate cuts to support the slowing economy. The report said "Recent moderation in CPI inflation and expectation of ease in food inflation could help to ease overall CPI inflation in coming months. This will allow the MPC committee to consider rate cut in upcoming policy as the growth is also slowing down". The report suggested that while growth concerns will weigh on the MPC's decision, the focus will remain on ensuring inflation remains within manageable levels. The February policy meeting will be closely watched as the RBI attempts to strike a balance between fostering growth and maintaining price stability. (ANI)
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