‘RBI may cut rates in 2024-25 if food inflation is tamed’
- S&P Global Ratings predicts a potential interest rate cut by the Reserve Bank of India (RBI) in 2024-25, contingent on favorable food inflation and monsoon conditions.
- India's economic growth is noteworthy among its peers in the Asia-Pacific region, with a GDP growth projection of 6% this year and 6.9% in the next two years.
Economic Growth and Fiscal Challenges:
- Despite robust economic growth, higher interest rates pose a fiscal challenge for India.
- Government bond yields, historically higher than peers, add pressure to funding the country's large debt stock.
- S&P emphasizes the significance of interest rate dynamics in determining India's debt trajectory.
Monetary Policy and Interest Rates:
- It highlights the key theme of monetary policy in 2024, influenced by the global context of 'higher for longer' interest rates in the U.S.
- S&P anticipates controlled inflationary pressures, providing room for the RBI to consider normalizing monetary policy.
- The expectation is for lower interest rates in the next fiscal year, contingent on stable food inflation and monsoons.
Free Foodgrains Scheme and Fiscal Health:
- The extension of the free foodgrains scheme for 5 more years prompts discussions on potential fiscal impacts.
- S&P, believes that while more expenditure initiatives are possible, they may not significantly impact medium-term finances.
- Wood expects the government to adhere to fiscal deficit targets and its glide path through fiscal year 2026, citing flexibility in adjusting expenditure categories.
Conclusion:
- Overall, S&P Global Ratings remains optimistic about India's economic outlook, anticipating lower interest rates in the next fiscal year, provided that food inflation and monsoons remain favorable.
- Concerns about the extension of the free foodgrains scheme are tempered by expectations of fiscal discipline and flexibility in budget adjustments.
Prelims Take Away
- Fiscal Policy
- Inflation
- Monetary Policy
- MPC
- Rating Agencies