RBI Poised for Potential Rate Cut: SBI Research Forecasts 25 BPS Reduction Amid Benign Inflation Outlook

The economic winds are shifting, and an insightful report from SBI Research suggests a significant move on the horizon for India's monetary policy. The Reserve Bank of India (RBI) is projected to implement a 25 basis point (bps) rate cut during the third quarter of the fiscal year 2025, specifically between October and December 2024.

This anticipated shift is primarily driven by a robust outlook for benign inflation, with a particular focus on the trajectory of food prices.

India's retail inflation, as measured by the Consumer Price Index (CPI), has shown encouraging signs of easing. In May, it touched a 12-month low of 4.75%, a notable dip from the 4.83% recorded in April.

This downward trend provides a crucial backdrop for the predictions. While the RBI's Monetary Policy Committee (MPC) opted to maintain the repo rate at 6.5% in its most recent June meeting, their decision was heavily influenced by lingering concerns over 'stubbornly high' food inflation and the uncertainties stemming from the global economic landscape.

However, SBI Research paints a more optimistic picture for the coming months.

Their forecast for the average CPI inflation for the entire financial year 2025 stands at a comfortable 4.5%, edging closer to the RBI's target of 4%. This positive outlook is underpinned by several key factors: the expectation of a normal monsoon season, which is critical for agricultural output and food prices, and proactive measures taken by the government to manage supply-side pressures.

These elements are collectively anticipated to keep inflationary pressures in check.

The report highlights that the MPC's current stance of 'withdrawal of accommodation' is likely to evolve. As inflation continues to moderate, the central bank's focus is expected to transition towards a 'neutral' stance, paving the way for a rate reduction.

This move would not only respond to domestic economic realities but also align with global monetary policy trends. Several major central banks, including the European Central Bank (ECB), the Bank of Canada (BoC), and the Swiss National Bank, have already initiated rate cuts, with the US Federal Reserve also widely expected to follow suit in due course.

India's robust economic performance further strengthens the case for a potential rate cut.

The nation recorded an impressive 8.2% GDP growth for the entire fiscal year 2024, with the fourth quarter alone registering a healthy 7.8% expansion. This strong growth, coupled with a more stable inflation environment, provides the RBI with the necessary flexibility to consider easing monetary policy without jeopardizing economic stability.

The anticipated rate cut, therefore, is not merely a reaction to falling inflation but a strategic adjustment to foster continued growth and provide a boost to economic activity as India navigates its path towards sustained prosperity.