The Reserve Bank of India (RBI) is unlikely to follow the US Federal Reserve in cutting rates and may focus on aligning the inflation to the medium term target of 4 percent on a sustainable basis, economists said.
“RBI’s rate action will be more contingent on evolving growth inflation dynamics,” said Dipanwita Mazumdar, Economist of Bank of Baroda.
The RBI has been keeping the repo rate unchanged in the nine consecutive monetary policies, and focus on bringing down inflation to the target or below it. Currently, RBI’s repo rate is at 6.5 percent.
India's central bank targets consumer price index-based inflation and is currently mandated to keep inflation at 4% with a tolerance band of 2 percentage points on either side.
Gaura Sen Gupta, Economist, IDFC First Bank said the timing of the start of the rate cut cycle will depend on how food inflation pressures evolve.
“We continue to expect a shallow rate cut cycle of 50 basis points (bps) by March 2025, as a growth conditions hold-up. Food inflation pressures had eased in August 2024, as supplies improved. However, the trend in September remains mixed with NHB indicating a rise in vegetable prices,” Gupta added.
The Federal Reserve lowered its benchmark interest rate by a half percentage point on Wednesday, in an aggressive start to a policy shift aimed at bolstering the US labour market.
Projections released, following their two-day meeting, showed a narrow majority, 10 of 19 officials, favoured lowering rates by at least an additional half-point over their two remaining 2024 meetings.
The Federal Open Market Committee voted 11 to 1 to lower the federal funds rate to a range of 4.75 percent to 5 percent, after holding it for more than a year at its highest level in two decades.
Wednesday's decisive move highlights the growing concern among policymakers over the employment landscape. “The committee has gained greater confidence that inflation is moving sustainably toward 2percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the Fed said in a statement, adding that officials are “strongly committed to supporting maximum employment” in addition to bringing inflation back to their goal.
Further, on the stance front, Mazumdar said based on the underlying liquidity conditions, change in stance at this current juncture doesn’t seem appropriate.
Currently, RBI maintains the ‘Withdrawal of Accommodation’ stance.
“The current stance is also contingent on the evolution of inflation trajectory. Thus, at this moment it doesn’t give RBI the headroom to tinker on the same,” Mazumdar added.
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