The Reserve Bank of India (RBI) may postpone the beginning of its rate cut cycle to April 2025 because of the Federal Reserve’s shift towards a more hawkish monetary stance, said a report by Yes Bank.
“Given INR weakness and developing volatility in financial markets, we see the start of the rate cut cycle to shift to April 2025”.
The report highlighted that the Federal Reserve recently reduced its policy rate by 25 basis points (bps). However, the forward guidance has scaled down the projected rate cuts for 2025 to just 50 bps, compared to the earlier expectation of 100 bps.
Federal Reserve Chair Jerome Powell indicated that the decision to cut rates in December was closely contested, suggesting that while monetary policy remains restrictive, it is nearing a neutral stance.
The report noted that this Fed’s decision has implications for global financial markets.
“The Fed watch tool is pricing in no rate cut for January 2025, signalling a slower pace of monetary easing.”
This has strengthened the US dollar and pushed up US Treasury yields, creating challenges for central banks of emerging markets including the RBI that may have been considering easing its monetary policies to support growth.
The report analysed and pointed out that the RBI now faces a complex balancing act between supporting domestic growth and managing inflation risks. The depreciation of the Indian rupee and heightened financial market volatility further complicate the situation.
It said, “RBI will now have to juggle the domestic growth imperatives alongside keeping inflation risks at bay”.
This delay may impact India’s growth trajectory, as businesses and consumers might face prolonged higher borrowing costs, limiting economic momentum in the near term.
RBI’s MPC has kept the policy repo rate unchanged at 6.5 per cent from the past 10 consecutive meetings. Meanwhile, the central bank has got a new governor Sanjay Malhotra, who will present the next monetary policy in February 2025.
(With ANI inputs)
