RBI Inflation Target To Be Kept At Four Percent, RBI Gov. (Image: x.com/RBI)
After RBI”s recent policy statement, economists are of the view that, the interest rate cuts could materialise only after Q1 of fiscal year 2025, reported the mint. Last week, the RBI Governor, Shaktikanta Das said that the inflation target was not two percent to six percent but four percent. As per the estimates of the RBI, the inflation rate is expected to stay at average 4.5 percent in the fiscal year 2025. The expectation is that inflation would fall into the desired range, provided there are no more policy shocks, and that a normal monsoon would prevail.
At a press conference, after the monetary policy meeting, the Governor said, “if inflation is at 4% or below 4% on a durable basis, that may call for a rethink. But not at the moment.”
The expectation of economists on this is that, a cut in the rates would be undertaken by the RBI only in the second half of the year 2025, when, the inflation rates would near the expected 4 percent.
The global financial services group, Nomura, said in a report that, “we are pushing out the first rate cut from February to April, while retaining our forecast for 100 basis points (bps) in cuts in 2024 which would take the policy repo rate to 5.5% by end-2024.”
On this matter, QuantEco Research said, “RBI is cautious as long-term inflation expectations of market participants remains elevated with 5Y and 10Y ahead average inflation tracking 4.9% and 4.5% respectively despite accelerated monetary tightening since Apr-22. Emphasis on the 4% inflation target and liquidity calibration have been chosen as means to dissuade pre-mature monetary easing expectations.”
The Overnight Index Swap (OIS) over one year, is now at 7.06%, this is an indication that there would be no actions on the rate and tighter liquidity conditions in the coming one year, said mint. This measure, OIS, is trusted to provide a clear indication about the policy actions in the future.
The ICICI Securities Primary Dealership, said in a note on this, “RBI’s reaction function has been in sync with our view so far and the latest decision should continue to push out any expectation of accommodation to deep next fiscal. The current pricing in the swap markets is much more aligned with this view, with implied pricing of a mix of rate hike plus tighter liquidity conditions.”
As per the RBI, the inflation outlook in whole, is marred by uncertainties, starting from the kharif sowing and low levels in the reservoirs to the volatility in the global food and energy prices. India’s headline inflation had driven high in July upon the prices of tomato and other vegetables, which was partly corrected in the month of August and is expected to meet with further easing.
Nomura report, further said on India’s inflation policy, that, “Our macro view envisages a synchronised global growth downturn, a slowdown in India’s domestic demand and a continued moderation in core inflation towards 4.5% in the coming months. In this backdrop, we expect the policy focus to gradually shift from inflation control to supporting growth, as we expect the one-year forward real rate will rise closer to 2% by early next year.”
