According to a report from Deutsche Bank, it is expected that the Reserve Bank of India (RBI) will keep interest rates steady and reduce the repo rate by 100 basis points in 2024. The RBI has previously increased the repo rate by 250 basis points, while the Fed Funds rate has gone up by 500 basis points. If the Fed Funds rate decreases by 200 basis points in 2024, it would be reasonable to anticipate that the RBI would reduce rates by about half of that amount, or 100 basis points, according to Kaushik Das, the chief economist for India and South Asia at Deutsche Bank.

Das believes that the RBI is unlikely to start cutting rates before the Federal Reserve, as the interest rate difference between the repo rate and the Fed Funds rate is currently near all-time lows (150 basis points). The liquidity in the market has tightened considerably in recent months, with the Mumbai Interbank Offered Rate (MIBOR) currently quoting at 6.90 percent, which is 40 basis points higher than the RBI's policy repo rate of 6.50 percent. This tightening is equivalent to a rate hike, even though the RBI decided to keep the policy rate unchanged in April, contrary to expectations of a 25 basis points increase. Although the RBI has chosen to maintain the policy rate, the tighter liquidity conditions in the money market have caused short-term interest rates to rise above the marginal standing facility (MSF) rate of 6.75 percent. The durable liquidity surplus has decreased to ₹55,700 crore by April 21 from around ₹80,000 crore on April 7. At the beginning of the year, the durable surplus liquidity was approximately ₹2.9-lakh crore. Das expects the RBI to continue conducting term repo auctions to prevent excessive and persistent liquidity tightening. However, he believes that short-term money market rates are likely to remain slightly higher than the repo rate by 10-25 basis points.

Considering the effective tightening of short-term rates by more than 25 basis points, even though the repo rate was held steady at 6.50 percent in April, and assuming that the April Consumer Price Index (CPI) inflation will be below 5 percent, Das argues that there is no strong justification for the RBI to raise rates further. While a potential poor monsoon could pose a future threat to inflation, Das believes that current rates are sufficiently high to control inflationary expectations, and any temporary increase in the CPI will likely be temporary.