Sticky US inflation, weaker rupee could mean a sub-optimal RBI rate cut cycle, say experts

The higher-than-expected US inflation print for January, coupled with the threat of tariffs, could disturb the rate cut cycle for the Federal Reserve and, consequently, the Reserve Bank of India, experts have told Moneycontrol.

“I do think that the exchange rates, the way they are going, can limit the extent of support the central banks generally give (in) emerging markets. The rate-cutting cycle may end up being sub-optimal from what the economy needs,” said Dhiraj Nim, FX strategist, ANZ.

US inflation in January rose 3 percent, the highest monthly increase in two years, data released on February 12 showed, ahead of the estimate of 2.9 percent.

“This is an uncomfortable print for the Fed, even with some seasonal factors playing a role in the upside surprise. It is reminiscent of early 2024 when inflation was hotter than expected and took a few months to move down - and with the additional threat of tariffs now looming, the Fed's hands will be increasingly tied as we move further into 2025,” said Madhavi Arora, chief economist, Emkay Global.

Though inflation has eased from around 5 percent rates in 2023, it has still not touched the 2 percent target set by the Federal Reserve.

Experts indicate that tariffs will keep inflation sticky for a longer term.

“The US CPI has faced issues in touching the 2 percent target for a while, and if one factors in the related impact of tariffs, then the CPI is likely to be more sticky,” said Paras Jasrai, senior analyst, India Ratings and Research.

After taking office in late January, President Donald Trump has imposed tariffs on China, Canada and Mexico. He has raised to 25 percent tariffs on steel and aluminium imports and has threatened retaliatory tariffs against more countries, including India.

During Prime Minister Narendra Modi’s recent visit, he offered tariff and trade talks after saying India is a “very hard” country to do business in and once again talked about high tariffs.

India’s inflation came in lower at a five-month low of 4.31 percent in January.

Experts said the RBI will be more watchful, given the threat the rupee depreciating further.

“All this, along with the weaker rupee and its cascading effect on imported inflation, would make the RBI more cautious about any further easing,” said Jasrai.

The RBI’s monetary policy committee delivered its first rate cut in the February meeting in five years, lowering the repo rate to 6.25 percent from 6.5 percent.

It, however, retained the stance as “neutral”, giving the central bank flexibility to respond to future threats.

The rupee has depreciated 1.5 percent since the start of the year.

Analysis shows that the RBI rarely moves in tandem with the Fed. Over the last two decades and 114 policy meetings, the RBI has followed the Fed only 16 times and that, too, mostly during hikes.