Rating agencies expect MPC to hold rates due to high inflation

Even as the RBI’s Monetary Policy Committee (MPC) commenced its three-day meeting on Wednesday, rating agencies expect that the rate fixing panel would keep rates unchanged considering CPI inflation breaching the 6% threshold limit. 

“With the CPI inflation having breached the 6% upper limit of the medium term range of 2-6% in October 2024, we anticipate a status quo from the MPC in its December 2024 meeting, in spite of the GDP growth print for Q2 FY2025 sharply undershooting the Committee’s expectations,” said Aditi Nayar, Chief Economist and Head of Research & Outreach, ICRA Ltd.

“At the same time, we anticipate that the MPC will moderate its growth forecast for FY2025 next week. A February 2025 rate cut may be forthcoming if the next two inflation prints recede,” she said.

Rating agency CareEdge said in a note that the RBI Governor would look to balance the inflationary risks and the growth concerns in its monetary policy statement. “While growth concerns have aggravated, we expect the RBI to maintain the status quo on rates as inflation still runs high. Instead of going for a rate cut, the governor will address the growth concerns with a dovish commentary, laying the foundations for a rate cut in the February policy meeting,” it said.

“We expect the CPI inflation to fall below 5% in Q4 FY25, providing a window for a 25-bps rate cut. We anticipate an additional 25 basis point reduction in the policy rate for FY26. However, if growth momentum continues to lag, a 50-basis point cut in FY26 cannot be ruled out,” it added. “Given the sharp deceleration of the economic momentum in Q2, the governor’s statement would have a dovish underpinning, thereby laying the ground for a rate cut of 25 bps in the February policy meeting,” it said.  “For full-year FY25, we now expect GDP to grow by 6.5%. Hence, we expect RBI to revise its GDP growth forecast of 7.2% for FY25 downwards, closer to our projection of 6.5%,” it further said.

Given the recent CPI data, the MPC is expected to revise its inflation projection for FY25 upwards, aligning more closely with our forecast of 4.8%, compared to its previous estimate of 4.5%, the rating agency said.

Chandrajit Banerjee, Director General, CII, said the RBI should cut the key repo rate by 25 basis points, apart from taking a host of liquidity enhancing measures.