RBI unlikely to follow US Fed on rate cut, may monitor domestic cues, say economists

Reserve Bank of India

US Federal Reserve chair Jerome Powell’s recent comments indicating a rate cut, possibly as early as September, is unlikely to change the Reserve Bank of India’s (RBI’s) decision when its monetary policy committee meets in October for the bi-monthly review, economists have said.

The Indian central bank wants inflation to sustain at the medium-term target of 4 percent and currently, there is a risk of food inflation which needs to be monitored, they said.

“We do not expect the RBI to respond in the short term to the rising probability of start of rate cut cycle by the Fed in September 2024,” said Kanika Pasricha, chief economic adviser, Union Bank of India.

Manappuram Finance group chief economist Madhavankutty G said if the RBI were to follow the Fed’s lead, it would be counter to the stated position.

Speaking at the much-watched Fed's annual economic conference in Jackson Hole, Powell on August 23 endorsed interest rate cuts, confidence in imminent policy easing, saying further cooling in the job market would be unwelcome and that inflation was within reach of the US central bank's two percent target.

"The time has come for policy to adjust," Powell was quoted as saying by Reuters. "The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."

In an interview to NDTV Profit, RBI Governor Shaktikanta Das said on August 21 that India’s inflation must show signs of settling around the central bank’s target of 4 percent on a sustainable basis for a rate cut to be considered.

In the August monetary policy, the MPC projected CPI inflation for FY25 at 4.5 percent. In the second quarter of the ongoing financial year, inflation is pegged at 4.4 percent, Q3 at 4.7 percent and Q4 at 4.3 percent. CPI inflation for the first quarter of FY25 is projected at 4.4 percent.

Inflation dropped to a 59-month low of 3.5 percent in July from 5.1 percent in the previous quarter, as a favourable base helped contain pressures.

Consumer inflation had touched 7.4 percent in July 2023.

In the policy review earlier this month, the RBI left the benchmark repo rate unchanged at 6.5 percent, the ninth time it stuck to the status quo, over inflation worries.

It will be a “serious policy mistake” to cut rates based on the one-off dip in inflation, Das said.

On the “stance”, economists said the central bank may change to “neutral” in October from “withdrawal of accommodation”.

“Policy stance is expected to be changed to neutral in October 2024. We don’t rule out a change in stance and rate cut in the same policy,” said Gaura Sengupta, an economist at IDFC First Bank.

Madhavankutty also expects a change in stance as liquidity would ease due to government spending.

“We need to watch out if the government or RBI will act on a suggestion by bankers to keep government cash balances with them to mitigate slow deposit growth. If something like that is to happen then a change in stance is on the cards,” he said.