Prolonged high interest rates in India unlikely

- Reserve Bank will take necessary steps as per the demand of the time

While developed markets may have a long-term trend of high interest rates, India does not see a long-term trend of high interest rates. A segment of the market is expecting an interest rate cut in 2023 itself. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said the Reserve Bank's decision to keep the policy rate steady has ended the debate that rates will remain high for a long time. It is expected that the Reserve Bank's policy will depend on the data. However, with headline inflation expected to remain below 6 percent for most of FY24, increasing the policy rate pause may be a conservative call. But we must also remember that if there is a global recession then the local situation will also be affected and in this case the cyclical action of rates may change.

Due to the global recession, some analysts disagree with the Reserve Bank of India's growth projections. He believes the Reserve Bank is overly optimistic about growth and has projected GDP growth of 6.5 per cent in 2023-24. In February, it raised its growth forecast to 6.4 percent as it expected oil prices to fall to $85 a barrel from $95 a barrel. "The Reserve Bank's estimate of 6.5 per cent annual growth in FY24 is too optimistic and we expect a 1 per cent decline," Nomura said in a note.

According to Nomura, the upward revision to GDP growth estimates based on lower oil price estimates does not take into account the slowdown in global growth, which has led to lower price estimates, with Nomura expecting significant disappointment.

In its April meeting, the six-member Monetary Policy Committee decided to keep the interest rate unchanged at 6.5 percent after raising rates in six consecutive meetings before it. Reserve Bank Governor Shaktikanta Das asserted that the April policy was just a stopgap and the central bank was ready to act as the times demanded.

Economists say their main view is that the Reserve Bank will maintain long-term stability to assess past hikes. Apart from the issue of economic stability, the outlook on risk is skewed, he says. If inflation turns out to be different from the forecast, the rate can be increased, while if there is a slowdown in growth, the option of a sharp rate cut can be adopted.

Goldman Sachs expects two cuts in the repo rate in the first and second quarters of 2024. Goldman Sachs said, "We expect retail inflation to remain below 6 percent for the rest of the month (this is the upper limit set by the Reserve Bank) and the Reserve Bank will maintain stability till the end of 2023." The policy rate will be reduced by 25 basis points in the first and second quarter of calendar year 2024.

In the April policy, the RBI cut its inflation forecast for FY24 to 5.2 percent, down from the 5.3 percent forecast in the February policy. Broking is expected to slow growth due to stagnant external demand, geopolitical tensions and volatility in global financial markets.

The actual policy rate is already 1.3 percent and inflation is estimated at 5.2 percent in FY24. Now it looks like the stability will continue till June 23 and after that the further action will be cut till the end of 2023. This is because there is significant weakness in the global economy.