India Ratings expects policy rate cut of 25-50 bps in Oct-Mar FY25

India Ratings and Research expects the Reserve Bank of India to cut the repo rate modestly by 25-50 basis points in the second half of the next financial year. "There is no scope for large rate cut in this interest cycle," said Soumyajit Niyogi, director of core analytical group at India Ratings, while announcing the credit market outlook for 2024-25 (Apr-Mar).

The rating agency also believes that the RBI will gradually ease liquidity conditions from July, which will remain volatile in AprJun due to the General Elections. Issuances of certificates of deposit by banks will fall in 2024-25 owing to improved liquidity and improvement in the interest rate outlook will lead to a fall in shortterm rates, while "the longer end of the curve will remain at a level," Niyogi said.

"We are starting this fiscal year with a liquidity deficit, so the RBI would have to arrange this liquidity either by forex intervention or by OMO (open market operation) purchase at any time during the year," Niyogi said. At the end of Monday, liquidity in the banking system was in a deficit of 729.18 bln rupees, as against 791.35 bln rupees on Sunday, data from the RBI showed.

The incremental inflow in the bond market due to inclusion of government bonds in global indices will be the deciding factor for open market operation purchases by the RBI, Niyogi said. "First they will allow the forex flow to actually flow down to the system's liquidity and then sterilise through the swap market. The second, if required, they will do OMO purchase," he said. Niyogi expects the RBI to conduct open market operation purchases of 11.5 trln in 2024-25, if the inflows are strong.

Despite conducive domestic conditions, the rating agency does not expect a broad-based pick-up in private capital expenditure in 2024-25. "The government initiatives are conducive, that's why we see some traction in capex, but it is unlikely that it will be very high," Niyogi said.