Why RBI will not go for a rate cut now?

RBI MPC: This is not a hidden thing anymore, that RBI policy has been somewhat pegged to US Fed specifically over last two years even as it formally targeted inflation. This is very well taken as external dynamics have been fluid, implying that policy prerogative needs to be flexible to ensure financial stability. Again, RBI MPC policy is underway and is expected to hold rates stey for 7th time in a row. 

“ policy narrative has been explicitly domestic, but swift policy turns/pivots in last two years have been purely influenced by global cause (recall a few key pivots: Apr-22 – stance change followed by start of rate hiking cycle; Apr-23 – surprise pause; Oct-23 – OMO sales communication). This suggests that when needed, aim of financial stability may even precede inflation management. We understand that shifting debates on global narratives require RBI to be flexible as well,” Mhavi Arora, Chief Economist of Emkay Global said. 

But key question is: but can RBI precede Fed? 

“We see no merit in this, unless delayed Fed action comes with an immediate negative growth shock, we do not see a crash in EM risk assets, but re may be a little froth,” Emkay Global said in its MPC Preview note. 

According to Emkay Global. RBI would want to avoid ding to noise, including that related to stance change. “So RBI may be pegged to Fed on rate actions, while still ensuring operative call money rates not going below repo (VR may stay primary tool, but OMO sales could be used too, hinging on gauging nature of liquidity/or global dynamics),” report stated.

“ RBI is likely to continue with a rate pause at its first MPC meeting for FY25. Even though core and wholesale inflation have significantly eased but volatility in food prices continues to impinge consumer sentiment. Thus, keeping heline inflation above RBI target level of 4 per cent,” Shishir Baijal, Chairman and Managing Director, Knight Frank India said. 

According to Baijal, stable rates will continue to support housing market which has continued to remain upbeat. India’s housing market is currently witnessing an upcycle. Consumers have alrey factored in elevated interest rates and are still actively engaging in home purchases. However, affordable housing segment is experiencing sluggish residential sales; a well-timed rate cut could be supportive of this segment.

overall economic outlook remains upbeat despite some challenges in specific sectors. While re has been bro-based moderation in inflation, higher food inflation keeps heline numbers elevated. However, benign core inflation will comfort RBI as strong growth has mainly remained non-inflationary. Neverless, heline inflation will moderate in coming months, aided by a favourable base effect lasting until July 2024.

“ arrival of rabi harvests in market along with expectations of a normal monsoon next year will also alleviate pressure on food prices. RBI will thus be inclined to opt a cautious approach, preferring to assess evolving risks associated with food inflation before making any changes in its decisions,” CareEdge report ded. 

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