RBI unlikely to go for immediate rate cut: India Ratings

31 Oct 2024 Evaluate

India Ratings and Research (Ind-Ra) has said that it projects a decline in inflation for FY25, yet it emphasizes that immediate rate cuts from the Reserve Bank of India (RBI) are unlikely. According to Ind-Ra, the persistent pressure of elevated food prices continues to drive inflation, suggesting that any potential reduction in interest rates will hinge on evidence of stable inflation trends nearing the RBI’s target of 4 percent. As such, market participants may need to brace for a prolonged period without rate cuts in the near future.

While inflation and weak industrial activity weigh on the economy, there are positive signs in rural demand, driven by improved real wages for rural labourers in July and August 2024, and above-normal rainfall in most of the country. These factors are expected to boost consumption demand. Devendra Kumar Pant, Chief Economist at Ind-Ra, said 'The slow growth of net taxes in 1QFY25 coupled with sticky inflation is a major challenge being faced by the Indian Economy in FY25. Rising real wages have the ability to increase consumption demand led economic growth. The situation is still evolving, and festive sales is a key monitorable for a growth revision in FY25.’

Above-normal monsoon rainfall in 2024 has improved water reservoir levels, which could boost agriculture. However, weak industrial growth and declining net taxes-reaching a 16-quarter low-continue to weigh on the economy. Actions by major economies also impact India’s outlook. The US Federal Reserve’s interest rate cuts and China’s economic stimulus provide some relief, though tensions in West Asia could add uncertainty.