According to a recent Reuters poll, the Reserve Bank of India (RBI) is expected to maintain its current interest rates until at least July, longer than the anticipated timeline for the U.S. central bank. The decision is based on India’s robust economic growth and persistent inflationary pressures.
India’s economy recorded an impressive growth rate of 8.4% in the fourth quarter of 2023, surpassing other major economies. However, inflation remains close to the upper limit of the RBI’s target range of 2%-6%, indicating that a rate cut is not imminent.
All 56 economists surveyed in the Reuters poll predict that the RBI will keep the repo rate unchanged at 6.50% during its April 3-5 meeting. The experts, however, have differing opinions on when the first rate cut will occur. Nine out of 52 economists expect a cut in the next quarter, while 24 anticipate it in the third quarter, 17 in the fourth quarter, and the remaining experts foresee a rate cut at a later time. Median forecasts suggest that the rate will reach 6.25% by the end of September and 6.00% by the end of this year.
The combination of elevated headline inflation, which remains above 5%, and the strong fourth-quarter GDP figures is likely to make the Monetary Policy Committee (MPC) members cautious about reducing rates too soon. The downward trend in core inflation over the past year is seen as encouraging, but the MPC is expected to err on the side of caution and wait for clearer signs of a downward trajectory towards the 4% mid-point target.
The poll indicates that inflation is projected to decline to 4.00% in the third quarter before rising again. Median forecasts suggest average price rises of 5.40% and 4.60% in the current fiscal year and the following year, respectively.
Although India’s growth is expected to slow to 6.6% in the next fiscal year from the current year’s 7.6% (a significant upgrade from the previous prediction of 7.0%), it will still outpace other major economies. This factor reduces the incentive for the RBI to lower interest rates before its global counterparts, particularly the Federal Reserve. A separate Reuters poll suggests that the Fed is likely to deliver its first rate cut in June, but there is growing uncertainty about the timing.
The growth and inflation dynamics in India suggest that the RBI may maintain higher interest rates for a longer period compared to the Fed. The interest rate differential between the two central banks is expected to settle close to the historical trend, with the Fed implementing more significant rate cuts.