• The Reserve Bank of India (RBI) is expected to initiate rate cuts from February due to easing domestic inflation.
• The global environment, including rate cuts by major central banks, is conducive to this move.
• Domestic growth in India is nearing pre-pandemic levels, and the RBI's rate cuts could boost economic recovery.
• However, potential inflationary pressures from global trade policies could pose challenges, requiring a balanced and flexible approach to monetary policy.

The Reserve Bank of India (RBI) is projected to initiate a series of rate cuts starting from February, driven primarily by easing domestic inflation, according to a recent report by CRISIL Market Intelligence and Analytics, a S&P Global company. The report suggests that the conditions are becoming favourable for such a move, with inflation expected to ease towards the end of this fiscal year due to a healthy agricultural output.

The RBI's Monetary Policy Committee (MPC) has maintained the repo rate at 6.5 per cent, keeping a 'neutral' stance during its review meeting. The rise in headline inflation over the past three months has been a key factor in preventing a rate cut. However, with the arrival of the rabi, or winter, crop in the market, vegetable prices are expected to correct sharply, leading to an easing of food inflation.

This, coupled with benign non-food inflation, is expected to bring down headline CPI inflation, paving the way for the anticipated rate cuts. The report's projections align with the broader market sentiment. The conditions for a rate cut have been building up over the past few months, with inflation easing and the economy showing signs of recovery.

Global Environment and Rate Cuts

The global environment is also conducive to pursuing rate cuts. Major global central banks, including the US Federal Reserve (Fed) and the European Central Bank (ECB), have begun cutting rates, despite increased market volatility following the US elections. The Fed and the ECB have each cut 75 basis points in 2024.

However, the path to further rate cuts by the Fed is unclear due to incoming President Donald Trump's plans to impose higher tariffs, which could add to inflationary pressures. S&P Global predicts fewer rate cuts by the Fed in 2025 compared to expectations three months ago. Despite these uncertainties, the report suggests that the overall environment remains favourable for rate cuts, which could provide a significant boost to India's economic recovery.

India's Economic Outlook and RBI's Strategy

In India, domestic growth is moving closer to the pre-pandemic decadal average this fiscal, after posting an above-average growth of 8.2 per cent last year. The report suggests that the cumulative reduction in the upcoming cutting cycle would be less than the 250 basis points hiked since May 2022, as domestic growth momentum is projected to remain healthy and the global rate cut cycle is expected to be shallower.

The RBI's decision to cut the cash reserve ratio (CRR) is expected to quickly infuse liquidity into the banking sector. The RBI estimates a Rs 1.16 lakh crore increase in primary liquidity due to this cut. The MPC's neutral stance allows it to move on rates in the upcoming policy meetings. For now, it has used the CRR tool to support growth by improving systemic liquidity.