First RBI Rate Cut Likely In Feb With Easing Domestic Inflation: Crisil Report

New Delhi: The conditions are projected to turn favourable for rate cuts by the Reserve Bank of India (RBI) in India with the first one in February, and easing domestic inflation will be the main driver of rate cuts, according to a new report. Inflation is expected to ease towards the end of this fiscal, given healthy agricultural output. When the rabi, or winter, crop reaches the market, vegetable prices tend to correct sharply.

“Easing food inflation, coupled with benign non-food inflation, is expected to bring down headline CPI inflation,” according to the commentary by CRISIL Market Intelligence and Analytics, a S&P Global company. The RBI’s Monetary Policy Committee (MPC) kept the repo rate unchanged at 6.5 per cent, and maintained stance at ‘neutral’ during its review meeting this week. The rise in headline inflation — the RBI’s main target — in the past three months is what kept the rate cut away.

While major global central banks have begun cutting rates, market volatility has increased after the US elections. The US Federal Reserve (Fed) and the European Central Bank (ECB) have cut 75 basis points (bps) each in 2024.

The Fed’s path to further rate cuts is unclear because incoming President Donald Trump has spoken about imposing higher tariffs, which is likely to add to inflationary pressures.
S&P Global sees fewer rate cuts by the Fed in 2025 compared with expectations 3 months ago. Overall, the global environment is conducive to pursuing rate cuts.

In India, domestic growth is moving closer to pre-pandemic decadal average this fiscal, after posting above-average 8.2 per cent last year. “The cumulative reduction in the upcoming cutting cycle would be less than the 250 bps hiked since May 2022 as domestic growth momentum is projected to remain healthy and global rate cut cycle will also be shallower,” according to the report.

The cash reserve ratio (CRR) cut will quickly infuse liquidity in the banking sector. The RBI estimated Rs 1.16 lakh crore increase in primary liquidity due to this cut.
The MPC’s neutral stance permits it to move on rates in the upcoming policy meetings. For now, it has used the CRR tool to support growth by improving systemic liquidity, said the report.