India may reduce rates before the Federal Reserve does as stronger-than-expected employment data in the US weakens the case for monetary policymakers in the world’s biggest economy to begin the cycle of easing, said a report by ICICI Securities Primary Dealership.
Reserve Bank of India (RBI) Governor, Shaktikanta Das, Friday said that the rate-setting panel will look at domestic conditions while taking rate cut decisions and will not be following the Fed. Other central banks are also diverging from the Fed, as the Bank of Canada and European Central Bank cut rates last week.
“The RBI may well pivot before Fed starts its own cutting cycle and that scenario could well come into play given the latest NFP data (US Employment data) has come out strong, which may further delay the timing of the Fed cutting cycle”, the I-Sec report said.
The central bank has continued to predict strong growth and is awaiting more clarity on food inflation as monsoon begins, while the core inflation has slowed down at 3.2% on year. Core inflation measures the cost of goods and services, excluding costs of food and fuel.
Many institutions including UBS Securities do not expect a rate cut in this calendar year citing strong growth.
“Growth is good; so the RBI does not need to do a rate cut. The only time a rate cut can happen is if growth or inflation decline,” said Tanvee Gupta Jain, Chief India economist at UBS Securities. “We expecting a 50 basis point cut, but in CY 25,” she said. One basis point is 0.01%.
The growth forecast was upgraded to 7.2% from 7%, and inflation forecasts remained constant at 4.5%, mitigating the probability of imminent rate cuts. But the report attaches some probability to a scenario where growth could remain reasonably strong and inflation undershoots RBI forecasts, tracking close to 4% in the second half, opening the possibility of a rate cut.
