Crisil’s latest macroeconomic analysis suggests that the central bank may begin the easing cycle in February and that the policy interest rate drop could occur shortly. This information has been provided in this note by Dharmakirti Joshi, Chief Economist at Crisil and his team.
Possibility of reduction in food inflation
The report states that food inflation, which has been the biggest obstacle to rate cuts so far, is likely to come down. The reason for this is the good performance of agricultural production in the country.
It is important to note that a period of weakness has begun following monetary tightening in many of the world’s largest economies. The full scope of interest rate reductions is still somewhat unknown, though.
Conditions around the world that support rate decreases
According to the study, “Internationally, conditions are suitable for rate declines.” In December, the US Federal Reserve reduced the funds rate to 4.25–4.5%, a 25 basis point decrease.
The report did, however, include Donald Trump’s election triumph and stated that tax cuts are expected to increase fiscal pressure in the US and tariff hikes during his administration might raise inflationary pressures. S&P Global has forecast that the Federal Reserve will lower interest rates in 2025 than originally expected as a result.
The domestic economy’s slow expansion has raised demand.
On the home front, India’s slow economic expansion has raised calls for interest rate reductions. The growth rate in the current fiscal year is expected to be 6.4%, much lower than the high rate of 8.2% in the previous fiscal year, according to the National Statistical Office’s (NSO) first advance estimate. Weak fiscal change and high interest rates are to blame for this.
Indications of slight progress
Also, the Crisil study noted a little improvement in domestic financial conditions in December. India’s major financial market sectors are measured by the Crisil Financial Conditions Index (FCI), which increased from 0.4 in November to 0.5 in December.
Foreign portfolio investors (FPIs) came to Indian markets as a result of the decline in US Treasury yields. According to the research, this caused domestic yields to decrease and equities markets to gain strength.
Also, nations that import oil, like India, benefited from the decline in crude oil prices. However, the rupee was under pressure from the currency’s sharp rise, and it fell to a new low versus the dollar.
Important economic challenges
The difficulties preventing economic growth were also noted in the report. These include a weak rupee, high money market rates, and a lack of liquidity.
Overall, a rate drop is expected.
According to the report’s conclusion, the current situation makes an interest rate cut more likely. The team wrote, “Considering everything, we expect a policy rate drop to be relatively near currently.”
In addition to increasing economic development, a potential rate drop by the central bank will additionally boost investment and consumption. What monetary policy measures the Reserve Bank of India (RBI) executes in the upcoming weeks and how they affect the Indian economy will be important to watch.