Why RBI will not go for a rate cut now?

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

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

But the key question is: but can the RBI precede the 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 there may be a little froth,” Emkay Global said in its MPC Preview note. 

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

“The RBI is likely to continue with a rate pause at its first MPC meeting for FY25. Even though core and the wholesale inflation have significantly eased but the volatility in food prices continues to impinge consumer sentiment. Thus, keeping the headline inflation above the 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 the housing market which has continued to remain upbeat. India’s housing market is currently witnessing an upcycle. Consumers have already factored in elevated interest rates and are still actively engaging in home purchases. However, the affordable housing segment is experiencing sluggish residential sales; a well-timed rate cut could be supportive of this segment.

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

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

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