Indian stock markets may have corrected due to unfulfilled expectations of a climb-down from Reserve Bank of India on its 'cautious' stance on inflation, but the move came as no surprise to the more seasoned observers of the central bank.
The Indian central bank kept the benchmark repo rate unchanged at 6.50% in its sixth bi-monthly monetary policy statement for 2023-24, opting to maintain status quo on both the rates and the stance.
"We doubt the central bank will loosen policy until the second half of the year, later than almost all other major emerging markets," said Shilan Shah, deputy chief emerging markets economist at Capital Economics.
Though inflation has moderated from its peak of 7.4% in September 2022, it still remains above the RBI's medium-term target of 4%. Food inflation is a particular area of concern as adverse weather events could disrupt supplies, especially given that it's an election year.
"With the economy holding up well and inflation remaining above the 4% target for a few more months, we doubt the central bank will loosen policy until the second half of the year," he added.
This is despite the fact that RBI has upgraded its economic growth projections for the country to 7% for 2024-25.
RBI has, in recent briefings, underlined that its target for inflation is 4%, not a 'range' between 4-6%. Currently, inflation -- at around 5.5% -- is within the range, but not quite at 4%.
"The focus on the necessity of inflation to settle closer to 4% remains intact, suggesting the RBI remains cautious on inflation," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
As a result, most experts believe the RBI will hold off on rate cuts until inflation shows a more decisive downward trajectory towards the 4% mark. Moreover, when rate cuts do materialize, they are likely to be shallow.
Madhavi Arora, lead economist at Emkay Global Financial Services, believes rate cuts are unlikely to precede action from the US Federal Reserve. "We do not see the RBI preceding the US Fed in rate cuts. There has been massive flattening in the sovereign yield curve...We think 'playing the steepener' can easily wait till summer," she said.
Dharmakirti Joshi, chief economist at ratings agency CRISIL, too sees a rate cut as an unlikely event before June.
"We believe, given the tensions around the Red Sea — and its attendant impact — and given the trajectory of food prices an interest rate cut is unlikely in the April monetary policy review and would most probably come in June, if not later," he said.