RBI's rate cut dilemma: Keep pace with Fed's 50 bps slash or take slow path to easing?

The RBI still has the flexibility to remain focused on domestic inflation and risk management, noted analysts saying that the central bank may delay rate cuts to December or even 2025.

The US Federal Reserve's aggressive 50 bps rate cut came on expected lines, turning the spotlight on whether the Reserve Bank of India will follow suit in its upcoming monetary policy meeting. Analysts remain divided on this prospect; some foresee a rate cut as early as October, while others predict a delay until December or even 2025.

The cautious stance stems from the fact that India's robust economic growth and the ongoing challenge of elevated food inflation, which, although easing, will continue to shape the central bank's decision-making.

The RBI still has the flexibility to remain focused on domestic inflation and risk management, albeit there are over 20 days before its next MPC meeting, according to Emkay Global. The brokerage believes that RBI is likely to maintain its wait-and-watch stance and focus on being ‘actively disinflationary’, with the first rate cut likely by December.

"A case for an early cut is still less likely, and we continue to see shallow cuts by both Fed and the RBI in this cycle," said Madhavi Arora, Lead Economist at Emkay Global Financial Services.

Meanwhile, analysts at Nomura believe that an inflection in India’s monetary policy cycle is around the corner, and it is unlikely to be shallow.

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"We expect the RBI to cut its policy rate by a cumulative 100bp to 5.50 percent by mid-2025, starting with a surprise rate cut this October," they said, adding that while the initial easing will realign nominal rates with lower inflation, rate cuts in 2025 will likely be triggered by weaker growth.

However, the brokerage cautioned that RBI could postpone its pivot as it waits for more evidence of food disinflation or to save policy space for a rainy day. "We could be wrong on the economic outlook (growth or inflation). That said, if we are right on the economic outlook, then a delay by the RBI to cut rates is unlikely to change the magnitude of the easing in this cycle," it added.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers view Fed's 50 bps rate cut as an aggressive start to the easing cycle, aimed at preemptively mitigating the risk of a hard landing.

However, the growth and inflation dynamics in India differ significantly from those in the U.S., as do the relative policy rate levels compared to historical norms, he noted.

As a result, Hajra does not expect the Reserve Bank of India (RBI) to follow the Fed's lead. "Our expectation remains that the RBI will maintain its current policy stance and refrain from initiating a rate cut cycle within this calendar year," he told Moneycontrol.

While US Fed Chair Jerome Powell in his speech highlighted the strength of the US economy, noting a cooling labour market and eased inflation, the 50 bps rate cut decision raises questions about longer-term stability and potential risks, said Swapnil Aggarwal, Director, VSRK Capital.

The full impact on India's economy will depend on how the US economy evolves and how global investors adjust their portfolios, he said, adding, "The Reserve Bank of India may consider a pre-emptive 25 to 50 basis points rate cut before 2025".

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Offering a contrary view, SBI Chairman C S Setty, said that RBI is unlikely to cut the benchmark policy rate in 2024 due to food inflation concerns, according. Despite potential rate cuts by the Fed, the RBI will focus on long-term inflation trends before making any decisions.

"While Fed rate cut would influence everyone, RBI would be mindful of the food inflation before taking a call on interest rate cut," Setty told PTI in an interview.

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