The latest US Federal Reserve’s statement, signalling three rate cuts next year, is unlikely to change interest rate trajectory in India with the monetary policy committee focussing on domestic factors but could nudge the central bank to revise its stance, say economists.
Experts indicate that the Reserve Bank of India (RBI) may change the policy stance to ‘neutral’ from ‘withdrawal of policy accommodation’ as early as the next meeting.
“There is going to be some reassessment of how emerging market central banks behave,” said Abheek Barua, chief economist, HDFC Bank, indicating the RBI may change its stance to neutral in January and “cut in line with the Fed, which would be late second half or early second half of 2024 calendar”.
The RBI’s monetary policy committee held the policy rate at 6.5% for the fifth consecutive time at its meeting last week, with members deciding to keep the ‘withdrawal of accommodation’ as policy stance with a 5:1 majority.
“The Fed’s twist doesn’t change the domestic part of our story. RBI is going to be cautious for the next four-five months and will be weary about loosening policy too soon,” said Radhika Rao, senior economist, DBS.
“If anything, the Fed’s decision could nudge the RBI to change its policy stance to neutral in April meeting,” Rao added.
India’s inflation inched up to a three-month high of 5.6% in November, rising from 4.9% in October on the back of high food inflation. Experts indicate that inflation is likely to hover around 6%-mark in December as well.
But growth, they point, is likely to provide RBI succour to move lock-in step with the Federal Reserve.
“Given that growth in the US remains positive, and inflation is still above target levels. The first Fed cut is expected from June/July 2024. RBI is expected to follow with a delay, given that growth in India remains stronger,” said Gaura Sengupta, economist, IDFC First Bank.
Keeping rates higher may also lead to liquidity issues, especially with bond index inclusion, points out Barua.
