RBI rate cut unlikely before Q2 of FY25: SBI

SK Ghosh, Group Chief Economic Advisor, SBI, says “if you look into the data of the US consumer spending and other data, labour markets are saying house prices are now declining in the US. Taking all these factors into account, I believe that possibly the slowdown in the global economy, specifically the US, at a rate which is larger than anticipated by the market would be the possible source of outside risk for the Indian economy.”

What is your view on what is happening to the yield rates globally? 10-year yields are coming down from 5% plus to 4.2-4.3% thereabouts. What is the normalised level world should make do with? Do you think 4.2%, 4.3% is the new normal or is it headed lower?

As we have said in our report recently, the outlook on the global economy so far is that the US could be spared a major recession and the growth has been very strong. But beyond these headline growth numbers, the US’ real economy numbers do not look so inspiring at this point of time. The payroll numbers have been revised downwards by eight times in nine months. There have also been some recession indicators showing that the US could be possibly on the verge of a significant slowdown. The only thing which is keeping the US economy headline growth strong is currently the excess savings of $1 trillion the US consumers have built up over the years.


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So taking all this and other factors into account and given the fact that the Brent crude prices are also taking a dip, these declines in the real yields indicate that there is a possibility of the US economy heading for a slowdown in 2024. How far and to what extent the slowdown will be is a matter of debate because the US is also poised for elections in November 2024. So that will also be taken into account by the markets.

But my sense is that at the margin, the decline in yields is giving enough hints that all is not well for the global economy in terms of growth momentum.

All is not well for the global economy in terms of growth momentum. Let us come to the Indian economy as well. Let us talk about Friday’s MPC meet. This time we are expecting the rates will remain at the same levels. But how long do you see this sustainable in terms of not taking any rate hike or rate cuts? In terms of GDP, what is the target and outlook for FY25?

In terms of a rate hike, I do not see the RBI hiking rates because the RBI also has been taking other measures to keep inflation down. Controlling liquidity overhang in the banking system is one of them. The macro potential terms, norms in terms of raising the risk rate is another. So I do not think that at this point of time, the rate hike is one of the priorities because the RBI is on a prolonged pause.

But the point to remember about inflation is that the food prices are not showing signs of significantly abating. If you remember and if you observe, the vegetable prices, specifically the tomato and onion prices, have currently been rising again. This could push the November and December inflation numbers well beyond 6%. So from that point of view, the RBI will pause but it will strike a note of caution that is prepared to look through the cycle and take steps if there is any unforeseen increase in the inflation outlook that is the first thing.

The growth outlook remains very strong as of now but in the second half of the current fiscal, the growth is likely to come off because of a higher base last year and also because of some declining momentum. But even at the margin, our forecast was above RBI forecast at 6.5% from the beginning. Currently, we have pencilled in a growth rate of 7% this fiscal. But next year there could be some moderation and 6.5% growth rate next year.

As of now, it looks like a distinct possibility. But next year’s forecast is early yet and things could change if more macro-political stability builds up at the Centre.

When will the rate cut cycle begin? Because there are estimates on the Street which are talking that it can perhaps be as early as March-April itself. Would you concur with the view that it could be pre-election as well? Also, everyone is talking about the Goldilocks scenario. What could go wrong? Is there anything that is worrying you?

We have pushed the date for the first rate cut, if it happens, to the second half of the next calendar year. So basically in 2024, it could be in the second half. Basically that is Q2 FY25 is the earliest when we are pencilling in any possible rate cut from the Reserve Bank of India. But regarding the second point, what could go wrong? I think the global economy has been subject to swings of vagaries. There has been many tail events in the last 15 years.

In 2008, we had a tail event. In 2020, we had a tail event. In 21, it continued. 22, also there was the Ukraine conflict; in 23 another Middle East conflict. So the only thing which could cause a state of bother is a slowdown in the world economy. But that is actually an interesting part because as I mentioned at the beginning of the show, the US also has elections in November 2024.

If there are any indications, there could be rate cuts from the Fed in 2024 earlier than that. That also could indicate that there is some sort of a slowdown which has already started to happen. In fact, if you look into the data of the US consumer spending and other data, labour markets are saying house prices are now declining in the US. Taking all these factors into account, I believe that possibly the slowdown in the global economy, specifically the US, at a rate which is larger than anticipated by the market would be the possible source of outside risk for the Indian economy.

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