RBI to cut rates in 2024-25 if food inflation remains under control: S&P Global Ratings

S&P Global Ratings expects the Reserve Bank of India (RBI) to cut interest rates in 2024-25 if food inflation and the monsoon don’t play spoilsport next year, and believes India would stick to its indicated fiscal glide path till 2026 despite the extension of the free food grain scheme by adjusting other spends.

The rating major, which expects India’s GDP to grow 6% this year and 6.9% through the next two years, said the country’s economic growth shines brightly among its BBB- to A-rated peers in the Asia-Pacific region, but higher rates pose a fiscal headwind.

Indian government bond yields, that have historically been higher than its peers, still remain high and put additional pressure on the cost of funding the country’s large debt stock, it noted. “While growth supports market confidence and revenue generation, rates dynamics will be an additional determinant of India’s debt trajectory over the next few years,” the firm said in a note on Asia-Pacific Credit Outlook for 2024 titled “Slowing Dragons, Roaring Tigers”.

Vishrut Rana, senior economist, Asia-Pacfic at S&P Global said monetary policy--and whether interest rates will normalise or stay elevated--is likely to be a key economic theme through 2024, in the backdrop of the ‘higher for longer’ interest rates in the U.S.

In India’s case, headline inflationary pressures are likely to remain controlled over the next several months and that means there is room for the central bank to consider normalising monetary policy, though the central bank is likely to keep one eye on financial stability and the other on exchange rates and capital flow stability amid tight global conditions.

“Having said that, we do expect that interest rates will be lower in the next fiscal year. The RBI is likely to proceed to cut interest rates, while inflationary pressures remain under control,” Mr. Rana said, adding that food inflation will always remain the “swing factor” for India. “As long as we see normal monsoons next year, we think interest rates are likely to be headed lower,” he concluded.

On the free foodgrains scheme’s extension for 5 more years and concerns that more freebies could be announced ahead of the general elections, possibly denting the country’s fiscal health, the rating firm’s sovereign ratings director Andrew Wood said they may not have a major impact on medium-term finances.

“Certainly, more expenditure initiatives are possible as we move through this election cycle. In the very near term, these could be supportive of consumption, as we tend to see around these periods of time,” he said, adding that the government is “quite likely to stick pretty closely to its fiscal deficit targets, and its glide path through fiscal year 2026, even after accounting for the extended food scheme, which we see at about 0.7% of GDP”.

“This is primarily because there tends to be significant adjustment to various expenditure categories throughout the year in any given Budget year, and calibrations can be made in the broader budget to get the targeted outcome, even when some expenditure programs are boosted. And the targets that the Centre has set for itself in terms of the pace of consolidation are very gradual. So there’s some room to maneuver within that glide path as well, as long as the economy stays pretty strong,” Mr. Wood reckoned, noting that revenue growth remains supportive and is expected to persist over the next few years.