RBI unlikely to follow the Fed in cutting rates

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The Reserve Bank of India (RBI) is unlikely to immediately follow US Fed in cutting the repo rate as its actions are primarily determined by domestic growth-inflation conditions and the outlook.

The US Fed slashed its benchmark lending rate by 50 basis points to 4.75 per cent-5 per cent on Wednesday, its first reduction in more than four years, as it gained greater confidence that inflation is moving sustainably towards the 2 per cent target, and judged that the risks to achieving its employment and inflation goals are roughly in balance.

In his June 7th bi-monthly monetary policy review, RBI Governor Shaktikanta Das noted that there is a view that in matters of monetary policy, the Reserve Bank is guided by the principle of ‘follow the Fed’.

“I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions.”

“In other words, while we do consider the impact of monetary policy in advanced economies on Indian markets, our actions are primarily determined by domestic growth-inflation conditions and the outlook,” Das said.

Referring to the 50 bps cut in the Fed Funds rate as rather brave, Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, observed that RBI may disassociate from the interest rate developments in the US and may take independent view on the domestic rates based on evolving conditions.

Domestic conditions are paramount and with robust growth higher than potential output, a case for pause exists, he said, adding that this is further supported by the fact that the impact of a weak dollar on international commodity prices and its pass through on Indian economy may evolve in coming days.

Additionally, the better liquidity position may provide the cushion to the Central Bank to ensure that the financial system can support the festive demand for credit.

Domestic dynamics

“As such, we don’t anticipate any rate action by RBI in calendar 2024. An early 2025 rate cut (February) looks the best bet as of now. We still believe that liquidity challenges will remain for the banking sector with Government cash balances progressively moving out of the banking system with a move towards just-in-time mechanism,” Ghosh said.

Madhavi Arora, Chief Economist, Emkay Global Financial Services Ltd, noted that RBI still has room to prioritise domestic dynamics.

The outsized cut by the US Fed has given Emerging Market Economies in Asia room to proceed with their own easing cycles, with the Bank of Indonesia delivering a 25 bps cut earlier in the day, she said.

“With the global market reaction having been muted thus far, the RBI still has flexibility to remain focused on domestic inflation and risk management, albeit there are over 20 days before its next MPC meeting.

“The RBI is likely to maintain its wait-and-watch stance and focus on being actively disinflationary, with a 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,” as per Arora’s assessment.