MUMBAI: Economists expect rates to remain higher for longer, with the latest inflation data exceeding RBI’s tolerance band ahead of the upcoming monetary policy committee (MPC) meeting. At the same time, FM Nirmala Sitharaman and commerce minister Piyush Goyal have made a case for RBI to overlook the spike in food prices and reduce interest rates.
“Both govt and RBI are talking of their specific objectives and both help to maintain momentum of economy. Govt believes lower rates can spur investment and consumption. Meanwhile, RBI’s MPC is mandated to set policy rates with the primary goal of controlling inflation. With inflation currently outside the tolerance band, MPC will consider this while deciding on rates,” said Madan Sabnavis, chief economist, Bank of Baroda.
Sabnavis said that while lower rates theoretically boost consumption and investment, this isn’t always observed during low-rate periods. “Consumption spending primarily depends on income levels, among other factors, with borrowings only supporting consumption marginally. Similarly, investment decisions are largely driven by capacity utilisation,” he said.
Although banks see deposit rates peaking, some, including SBI, now expect rate cuts only by February. Radhika Rao, senior economist at DBS, said, “Episodes of strong unseasonal rains have impacted perishables’ costs along with pass-through of import tax hikes on oilseeds. These will push the Q3FY25 quarterly inflation above the RBI’s projection for a second consecutive quarter, to mid-5% compared to the official forecast at 4.8% YoY.”
Rao added that fading supply disruptions could align inflation with targets, creating a narrow window for rate cuts in early 2025. “We expect rate cuts to start in Feb 2025, but revise the magnitude to 75bps by end-2025,” she said.
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