In its recent policy last week, RBI Governor Shaktikanta Das made it clear that the central bank’s inflation target is 4% and not 2 to 6%. According to RBI’s estimates, inflation is expected to average 4.5% in fiscal year 2025. In fact RBI is expecting inflation to fall below 4% to a range of 3.8-5.2% next fiscal, if monsoon remains normal and there are no further policy shocks.

“If inflation is at 4% or below 4% on a durable basis, that may call for a rethink. But not at the moment,” said Das during the press conference after the monetary policy meeting.

Economists now expect RBI to cut rates only in second half of fiscal 2025 when inflation may soften to near 4% target.

“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,” Nomura said in a report.

According to QuantEco Research, “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 1 year Overnight Index Swap (OIS) is currently at 7.06%, indicating no rate action and tighter liquidity conditions in the next 1 year. OIS are interest rate derivative products that move as per expectations of rate trajectory and are seen as the clearest indication of future policy rate actions.

“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,” said ICICI Securities Primary Dealership in a note.

Earlier, the Federal Reserve held its key interest rate steady and signalled it would remain elevated for longer than expected.

Headline inflation, which had surged in July driven by tomato and other vegetable prices, corrected partly in August and is expected to see further easing in September on the back of moderation in these prices. According to RBI, the overall inflation outlook, however remains clouded by uncertainties from the fall in kharif sowing for key crops like pulses and oilseeds, low reservoir levels, and volatile global food and energy prices.

“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,” said a Nomura report.

“Exciting news! Mint is now on WhatsApp Channels 🚀 Subscribe today by clicking the link and stay updated with the latest financial insights!” Click here!

Updated: 09 Oct 2023, 10:12 PM IST