When will the RBI cut interest rates? Experts predict timing and impact

Economists remain divided on when the Reserve Bank of India (RBI) will shift to rate cuts, particularly in light of sluggish GDP growth and persistently high inflation. Several experts interviewed by CNBC-TV18 are forecasting February as a likely starting point for the RBI’s rate-cutting cycle, depending on fiscal developments and global economic conditions.

The RBI on Friday maintained repo rate at 6.5% for the 11th consecutive meeting, but the regulator reduced the Cash Reserve Ratio (CRR) by 50 basis points. This reduction, the first since March 2020, brings the CRR down to 4%, injecting ₹1.16 lakh crore into the banking system to boost liquidity.

While experts broadly agree that February could signal the beginning of a rate-cutting cycle, the pace and extent of any easing will depend on inflationary trends, fiscal dynamics, and global economic conditions.

Kaushik Das, Chief Economist at Deutsche Bank, believes February could be an optimal time for the RBI to start cutting rates.

“Not because data is very poor at that point of time, but you are looking ahead in the next two to three quarters and taking a call,” Das said. He cautioned that delaying a rate cut could risk the RBI falling “behind the curve.” Das predicts a cumulative 50-basis point rate reduction split between February and April to provide necessary support to the economy.

Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, also sees February as a viable window for the first rate cut, contingent on inflationary trends. “The second quarter inflation reading at 4% is suggestive that six months down the line, disinflation toward the last mile could be achieved,” she said. However, Bhardwaj stressed that global economic developments will play a crucial role in determining the timing of any rate reduction.

Pranjul Bhandari, Chief India Economist at HSBC, predicts a shallow rate-cutting cycle, with 50 basis points spread over February and April. She, however, believes the RBI’s growth expectations may be overly optimistic. “The RBI is thinking, in the second half of the year, growth will average 7%, but we think it will be closer to 6.5%,” Bhandari said. She pointed to slower tax revenue growth, restrained government spending, and potential delays in agricultural output as factors that could dampen rural demand recovery.

Kanika Pasricha, Economist at Union Bank of India, agreed with the February timeline for rate cuts, expecting an initial 25-basis point reduction, followed by another 25 basis points in April.

The RBI is grappling with a complex economic environment. Retail inflation in October stood at 6.21%, well above the central bank’s target range of 4%-6%. Additionally, the RBI has raised its inflation forecast for the financial year 2025 to 4.8%. Meanwhile, the central bank has lowered its GDP growth forecast from 7.2% to 6.6%, reflecting ongoing challenges to economic expansion.