The Reserve Bank of India (RBI) may delay its anticipated rate cuts, as pressure on the Indian rupee and rising foreign exchange (FX) intervention costs weigh on monetary policy decisions. Following recent moves by the US Federal Reserve, which revised its inflation projections for 2025 upward and reduced the number of expected rate cuts, India’s central bank faces tighter constraints in adjusting interest rates.
The US Fed’s updated policy for December 2024 now forecasts fewer rate cuts in 2025—just two compared to the previously anticipated three. Along with a 40 basis points upward revision in its median projection for the Federal Fund’s rate to 3.9%, these changes signal a more hawkish stance from the US central bank. This, coupled with the Federal Reserve’s decision to increase the benchmark 10-year US Treasury yield, suggests that India’s interest rate spread over the US remains the lowest in recent history.
Less attractive option
Amid this backdrop, analysts believe that RBI rate cuts, previously expected for February 2025, are now uncertain. The widening gap in interest rates with global markets, combined with growing FX pressures, makes a rate cut less attractive for the RBI. The declining value of the rupee and the escalating costs of foreign exchange interventions further complicate the situation.
In India, inflationary concerns are still prominent, despite a predicted dip in food prices. The overall inflation outlook remains elevated, especially with growth expectations rising in the latter half of FY25, as the effects of elections and weather-related factors subside. The RBI has already slashed the Cash Reserve Ratio (CRR) by 50 basis points to stimulate growth, but this may not be sufficient to offset the global economic challenges and domestic pressures.
The dynamics of India’s external sector, inflation, and growth prospects will shape the RBI’s policy actions moving forward. Despite the challenges posed by global inflation and currency pressures, the RBI is expected to take a cautious approach, as external economic factors could continue to influence domestic monetary policy decisions in the months ahead, experts say.
