Market expects MPC to implement cumulative 50 bps rate cut by March 2025

They also foresee a continued decline in food prices, which fell to 5.1 per cent in July from 8.4 per cent in June year-on-year, further supporting expectations of a rate cut

With improved liquidity in banking, driven by increased government spending, market participants expect the Reserve Bank of India’s (RBI’s) Monetary Policy Committee to cut rates cumulatively by 50 basis points by March.

They also foresee a continued decline in food prices, which fell to 5.1 per cent in July from 8.4 per cent in June year-on-year, further fuelling expectations of a rate cut.

“We expect a 50-basis point cut by March. So, the rate-cut cycle starts either in October or December, with December appearing more likely because for now the RBI will need a few more months of well-behaved food inflation to have confidence that such price rise is behind us,” said Gaura Sen Gupta, economist, IDFC First Bank.

The overnight index swap (OIS) curve reflects a rate cut early 2025, said market participants. They expect liquidity to remain comfortable in the near term.

“Liquidity will remain comfortable. And the RBI desires money-market rates to be around the repo rate. That is what will happen. So, adequate liquidity will be there and they will continue variable rate reverse repo auctions. I do not think they are looking to withdraw liquidity on a durable basis,” said Vikas Goel, managing director (MD) and chief executive officer (CEO), PNB Gilts.

Surplus liquidity in the banking system stood at Rs 1.52 trillion on Sunday, according to the latest data by the RBI. Liquidity had improved to a one year-high of Rs 2.77 trillion on August 4.

Since August, the weighted average call rate has been hovering in a major way under the repo rate, reflecting the impact of surplus liquidity. The repo rate currently stands at 6.50 per cent. On Monday the weighted average call rate settled at 6.52 per cent.

“We expect the RBI to cut cumulatively 50 basis points by March. With credit growth slowing and the liquidity situation expected to remain in surplus, we believe we are closer to the peaking of lending and deposit rates in the system,” said Suresh Ganapathy, managing director and head of financial services research, Macquarie Capital.

Even if the RBI paused rate increases in February 2023, it continued with the “withdrawal of accommodation” stance. Between May 2022 and February 2023, the repo rate was increased by 250 basis points to 6.5 per cent.

“The RBI will be on both sides. It will provide liquidity if the system is short because it wants to keep the rates close to the repo rate. So I don’t think it is in liquidity withdrawal mode,” said Naveen Singh, vice-president, ICICI Securities’ primary dealership.