The Reserve Bank of India (RBI) is not expected to immediately follow the US Federal Reserve’s decision to cut interest rates, as its monetary policy actions remain primarily driven by domestic economic factors. While the US Fed recently reduced its benchmark lending rate by 50 basis points to 4.75%-5%, marking its first cut in over four years, the RBI is likely to maintain a wait-and-watch approach.
The RBI is anticipated to maintain its pause on rate cuts for the remainder of 2024, with an early reduction possibly in February 2025, should domestic conditions warrant it, experts said.
“The aggressive rate cut by Federal Reserve has important bearing on RBIs own decision on interest rates. Although this is not explicit, fall in dollar rates impact the domestic inflation through international prices. The recent minutes of the RBI MPC do indicate discussions on possible Fed rate actions. RBI may disassociate from the interest rate developments in the US and may take independent view on the domestic rates based on evolving conditions,” said SBI Ecowrap. Domestic conditions are paramount and with robust growth higher than potential output, case of pause exists, the report said, adding that this is further supported by the fact that impact of weak dollar on international 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 let the festive season tide over. “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 JIT mechanism,” it said.
The factors
RBI Governor Shaktikanta Das has consistently emphasised that the central bank’s decisions are determined by local growth and inflation conditions, rather than international developments. This approach means that despite the US Fed’s move, the RBI will continue to focus on the domestic economic outlook, which remains stable with robust growth.
India’s current economic scenario, marked by growth higher than potential output, supports the case for the RBI to hold off on any immediate rate cuts. Additionally, the country’s liquidity position remains favorable, which could help meet the upcoming festive demand for credit without requiring a change in monetary policy.
With the next RBI Monetary Policy Committee (MPC) meeting still over 20 days away, the central bank is expected to retain its cautious stance, prioritizing inflation management and risk mitigation. While the US Fed’s decision may have provided room for emerging markets in Asia to begin their easing cycles, such as Indonesia, the RBI is likely to focus on its own inflationary targets before considering a rate cut.
