MUMBAI (Reuters) - The Reserve Bank of India will likely start cutting the policy repo rate in early 2024 once headline inflation eases toward the 4% target, S&P Global (NYSE:SPGI) Ratings said.
"In India, under the assumption of normal monsoons, we expect headline consumer inflation to soften to 5% in fiscal 2024 from 6.7%," the rating agency said in a report dated June 25 that was released to the media on Monday.
"Softer crude prices and tempering of demand will bring down fuel and core inflation, respectively."
Annual retail inflation cooled to a more than two-year low of 4.25% in May as cost pressures on food eased. Inflation in May was within the RBI's target band of 2-6% for the third straight month.
India's monetary policy committee has raised the repo rate by 250 basis points since May 2022 but held it steady at 6.50% in April and June this year. The committee is widely expected to pause hikes for the rest of 2023.
S&P said that India's inflation and rate hike cycles have peaked. It expects inflation to average 5% this fiscal year, below the RBI's forecast of 5.1%, and clock a 6% growth in gross domestic product.
As inflation and external deficits recede in Asia, the pressure on central banks to raise rates has also eased, S&P said. Even as calls for rate cuts grow louder, there is little room for lower rates anytime soon in a setting of high-interest rates in the United States, it added.
S&P expects RBI to cut the rate by 25 basis points this fiscal year, taking the repo rate to 6.25% by March-end. The RBI could thereafter cut the rate by 100 bps over 2024-2, it added.