More policy interest rate cuts to come in India: Fitch

MUMBAI: India’s Reserve Bank of India could lower its key policy repo rate by another 50 basis points by the end of fiscal year 2022, estimates Fitch Solutions a unit of Fitch Group. In its forecast, Fitch Solutions is looking at a 25 bps cut at the last FY21 policy meeting in February 2021 and another 25 bps by the end of FY22. Fitch solutions expects the repo rate to bottom at 3.50%, from 4.00% as of the December meeting.

The RBI’s monetary policy committee recently stayed pat on the key policy repo rate at 4% while maintaining its accommodative stance. The MPC kept rates on hold in light of headline inflation still coming in above its 6% target upper bound as of the latest print in October.

“Given that India’s economic recovery momentum is likely to slow after the August-November 2020 festive season, combined with revenue constraints limiting scope for fiscal stimulus to drive further momentum, we believe that further support from monetary policy will be necessary to lift India out of its current economic weakness,” the Fitch group unit said in its note.


Fitch solutions believes that inflation will ease along with improving food supply as the summer harvest feeds through the economy, which will allow the central bank to resume its rate cutting cycle in February 2021 to add tailwinds to India’s economic recovery.

In the December monetary policy statement, the MPC maintained its stance to keep monetary policy accommodative ‘as long as necessary’ and ‘to revive growth on a durable basis and mitigate the impact of Covid-19 on the economy’, while also working to manage inflation within its target range of 2% to 6%.

The MPC now expects inflation to remain elevated despite some relief to food inflation over the near term, and has stated that high inflation ‘constrains monetary policy at the current juncture from using the space available to act in support of growth’.

This statement suggests that the RBI will ease further when it sees that inflation has eased below its 6% inflation upper bound.

The RBI revised up its inflation projection for Q3 FY21 to 6.8%, Q4 FY21 to 5.8% and projects inflation to range 4.6-5.2% in the first half of FY22.

It expects rural demand to strengthen further, and for urban demand to gain momentum as easing Covid-19 restrictions aids activity and employment, and has revised up its growth projection to a 7.5% contraction in FY21, from 9.5% contraction in the October statement.