RBI's pivot to rate cuts to begin only in early 2024: Rating agency S&P

Global rating agency Standard and Poor's (S&P) today said the policy rate cuts in India are expected to begin only in early 2024 as the Reserve Bank of India (RBI) would like to see consumer inflation (CPI) moving to four per cent.

"Softer crude prices and tempering of demand will bring down fuel and core inflation, respectively. The inflation and rate hike cycles have peaked. But we expect the RBI to cut rates only in early 2024, as it wants to see consumer inflation moving to 4.0 per cent --the center of its target range", it said. These comments form part of S&P's Economic Research: Economic Outlook Asia-Pacific Q3 2023 report, released this morning.

In India, under the assumption of normal monsoons, the rating agency expected the headline consumer inflation to soften to 5.0 per cent in fiscal 2024 (FY24) from 6.7 per cent in FY23, it added.

The inflation and external deficits are receding; pressure on central banks to raise rates has diminished. Calls for rate cuts will grow louder. However, there generally is little room for lower rates any time soon in a setting of high U.S. interest rates and lingering inflation risk, S& P added.

Referring to economic growth momentum, it said India will be amongst the fastest-growing emerging economies with an average growth rate of 6.7 per cent between April 2023 to March 2027.

In its report, the rating agency said the medium-term growth outlook remains relatively solid. The Asian emerging market economies remain among the fastest-growing ones in the global growth outlook through 2026.

In India, growth in the March quarter (Q3Fy23) outperformed our expectations. Statistics India revised whole-year Gross Domestic Product growth in fiscal 2023 to 7.2 per cent from the earlier 7.0 per cent. It confirmed a strong recovery from Covid-19, S&P said.  
 

However, the growth of the region's (Asia-Pacific) economy faces several risks too. The challenging external financial conditions amid even higher U.S. interest rates. The slower-than-expected growth in the West and China and pockets of domestic interest rate stresses. And energy and commodity price shocks would inflame external deficits in several economies and inflation, it added.