Economists back RBI's rate cut caution despite Cabinet ministers' nudge

Economists back RBI's rate cut caution despite Cabinet ministers' nudge

Despite Finance Minister Nirmala Sitharaman and Minister of Commerce Piyush Goyal pushing for the rate cut by the Reserve Bank India, most economists are taking central bank’s side by saying that rate cut is not feasible at this juncture.

Views expressed by most economists suggest that current inflation dynamics will not allow the central bank to cut interest rate at this time unless there is a significant correction.

“RBI’s decision to cut rates hinges purely on the domestic growth-inflation dynamics. Inflation, of late, has overshot, driven by food and especially a supply driven phenomenon. Thus, unless there is significant correction in the same, RBI needs to stand pat and remain vigilant,” said Dipanwita Mazumdar, Economists at Bank of Baroda.

Similarly, Kanika Pasricha, Chief Economic Advisor at Union Bank of India, said rate cut by the RBI is likely to be late than sooner because the recent spike in inflation to 6.2 percent (which may cool only by Q4FY25), upward pressure on global rates on repricing of US Fed rate cut expectations and persistent depreciation will put pressure on the Rupee.

Recently, Finance Minister Nirmala Sitharaman, addressing representatives of India Inc and bankers at the State Bank of India’s Economic Conclave, said “affordable” bank interest rates are essential to support industries to ramp up and build capacities. "The cost of borrowing is really very stressful. At a time when we want industries to ramp up and build capacities, bank interest rates will have to be far more affordable,” she said.

At the CNBC-TV18 Global Leadership Summit, Commerce Minister Piyush Goyal made comments that the RBI should cut interest rates. Both these comments came weeks before the monetary policy meeting of the RBI, which is due in first week of December.

In the last few months, India’s CPI inflation remained on the upward trajectory due to persistent pressure from the food prices. The consumer price inflation touched a 14-month high of 6.21 percent in October as against 5.5 percent in September, which according to economists might have reduced MPC’s room to cut the repo rate in the immediate future.

The room for rate cut has reduced after the uptick in inflation because the central bank at so many instance has said that inflation should be aligned to the medium term target of 4 percent on a sustainable basis before any rate cut can be considered.

On September 13, RBI Governor Shaktikanta Das said inflation has moderated from its peak of 7.8 percent in April 2022 into the tolerance band of +/- 2 percent around the target of 4 percent, but we still have a distance to cover and can not afford to look the other way. Das said this at the Future of Finance Forum 2024 organised by the Bretton Woods Committee, Singapore.

Meanwhile, at the CNBC-TV18 event on November 14, Das said inflation is expected to moderate despite periodic humps.

This is also reflected in the inflation projections of the RBI in October monetary policy, where it projected CPI inflation for 2024-25 at 4.5 percent with Q2 at 4.1 percent; Q3 at 4.8 percent; and Q4 at 4.2 percent.

On rising inflation, most economists believe that the central bank is expected to remain cautious in the December policy.

“Global uncertainties in terms of future tariff hikes by the Trump administration and its possible impact on the rupee is likely to keep the RBI on the side of caution for now,” said Sakshi Gupta, Economist at HDFC Bank.