RBI has once again hit the brakes on interest rates, keeping the repo rate unchanged for the 8th consecutive time at 6.5 per cent. While the Monetary Policy Committee's (MPC) decision was largely in line with the expectations, there was a statement by Governor Shaktikanta Das that pointed out RBI's primary focus point.
More often than not, experts and analysts widely believed that RBI's interest rate stance is heavily influenced by the direction of the Federal Reserve and its decisions. However, RBI clarified in its second MPC meeting of FY25 that, "while we do consider the impact of monetary policy in advanced economies on Indian markets, our actions are primarily determined by domestic growth-inflation conditions and the outlook."
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Das pointed out that there is a view in matters of monetary policy, the Reserve Bank is guided by the principle of ‘follow the Fed’. "I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions," he said.
Post-covid, both RBI and Federal Reserve (Fed) have generally moved their interest rates in a similar direction. However, RBI has often adopted a softer stance, pausing rate changes more frequently as compared to Fed which has leaned towards a more hawkish stance at times.
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"While we do consider the impact of monetary policy in advanced economies on Indian markets, our actions are primarily determined by domestic growth-inflation conditions and the outlook," Das added.
Both economies have witnessed a slowdown in their core inflation figures. However, considering India's GDP growth numbers, which have remained above 7 per cent for the 4th consecutive year, the nation can slightly be placed in a better economic growth position.
Are rate cuts on the table this year?
ECB has already announced a rate cut. As per a recent Reuters poll, it is expected that the Fed might follow suit by implementing two interest rate cuts this year post-September. In India's case, analysts widely believe that a possible rate cut can only happen in late CY24 or early 2025, as inflation, although moderating, remains well above RBI's 4 per cent target.
Nikhil Gupta, Chief Economist, MOFSL Group believes that RBI's explicit mention of monetary policy in advanced economies will certainly help guide market expectations. "The Governor explicitly mentioned that the RBI does look at the global Overall, we continue to believe that rate cuts in India could happen only in late CY24 or early 2025, based on domestic and global economic growth," he said.
"The upward revision in growth, the expectation of a non-linear disinflationary process, and a clear signal that the RBI will not mirror the Federal Reserve's anticipated monetary policy easing, imply that a rate cut in 2024 is improbable," said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.
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However, RBI kept the benchmark interest rates unchanged with a 4:2 majority this time, a shift from the previous decision where it was 5:1. Considering the declining majority and falling inflation alongside the current high real interest rates, it appears that the RBI may not maintain the policy rates and liquidity tightening stance for an extended period, Hajra added.
Many believe that the RBI will not precede Fed in any policy reversal in CY24. But as India's inflation figure remains under control coupled with a better macroeconomic outlook compared to the US, can RBI surprise and precede the Fed in rate cuts?
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