Easing of rates by the Reserve Bank of India might still have to wait going by the hawkish tone in an assessment of the economy published by the RBI economists in its latest monthly bulletin.
“A modest easing of headline inflation in the reading for April 2024 confirms the expectation that an uneven and lagged pace of alignment with the target is underway” wrote the Reserve Bank of India deputy governor Michael Patra and his team in their assessment of the economy published in the latest monthly Bulletin.
Significantly the statement seems to suggest that full alignment with the target may still have to wait. Hence easing of rates. The views expressed are not that of the Reserve Bank of India.
The Reserve Bank has raised the benchmark policy rates by 250 basis points (one bps is 0.01 percent) since May 2022 as inflation surged way beyond the central bank’s comfort band of 2-6 percent. But the inflation numbers are slowly aligning to the target of 4 per cent. Yet the central bank has its concerns as food inflation continues to be high.
Headline inflation, as measured by yearly changes in the consumer price index or CPI , moderated to 4.8 per cent in April 2024 from 4.9 per cent in March largely due to base effect. Food inflation which accounts for more than 40 per cent of the share in consumer inflation edged up to 7.9 per cent in April from 7.7 per cent in March.
As for the economic activity, there is a growing optimism that India is on the cusp of a long-awaited economic take-off. “ Recent indicators are pointing to a quickening of the momentum of aggregate demand. Non-food spending is being pushed up by the green shoots of rural spending recovery,” Patra and his team said.
The report also highlighted that at the global level emerging market central banks will also have to follow the Fed even as they say that they are not Fed dependent.
Even as they think of easing policy rates, emerging market central banks face the pressure of weakening currencies. Sharp drops in the yen, yuan and won have complicated the outlook even further, prompting both verbal and forex sale defences, the authors said.
Increasingly, market expectations converge to the view that these central banks will not cut rates ahead of the US Fed in spite of high real interest rates. They state that they will not be ‘Feddependent’, but they will face practical limits on how far they can diverge from the Fed. Consequently, the rate easing cycle may turn out to be shallower than initially anticipated, they said.
