Even as the US Federal Reserve kicked off its easing cycle with a surprising 50 bps cut, Emkay Global said that the Reserve Bank of India still has flexibility to remain focused on domestic inflation and risk management, albeit there are over 20 days before its next MPC meeting. A rate cut, it added, is only expected in December. “The RBI is likely to maintain its wait-and-watch stance and focus on being ‘actively disinflationary’, with a first rate cut likely by December. A case for an early cut is still less likely, and we continue to see shallow cuts by both Fed and the RBI in this cycle,” stated a report by Emkay Global.
The US Fed, on Wednesday, announced its first reduction since the pandemic, sharply lowering borrowing costs shortly before November’s presidential election. Policymakers voted 11-to-1 in favour of lowering the US central bank’s benchmark lending rate to between 4.75 per cent and 5.00 per cent, the Fed announced in a statement. The decision to ease was taken “in light of the progress on inflation and the balance of risks”, with the FOMC judging that “the risks to achieving its employment and inflation goals are roughly in balance”.
This start to the easing cycle, Emkay Global said, provides some space to emerging markets to kick-start theirs too, but with low global volatility thus far, the RBI is likely to remain focused on domestic dynamics, with a first rate cut by December.
However, Fed Chair Jerome Powell emphasized that the economy remains in good health, and that 50 bps is not going to be the pace of easing going ahead. While neither the post-meeting statement nor Powell’s presser gave any guidance on the size or pace of rate cuts, though both indicated a bias towards further easing. Jerome Powell at times pointed to the latest dot plot, where the median dot for this year points to two additional 25bp eases, and four more 25bp cuts next year. Powell stressed that the outsized easing was not in response to an imminent recession ahead. He stated that the committee has “growing confidence that strength in the labor market can be maintained”, and this move was a policy realignment to a soft landing scenario.
“The message that the Fed is recalibrating to a lower level of rates quickly, but not changing its baseline view for next year, was reinforced by the median projection, with little change in the growth and inflation forecast and no change from the June forecast for 100bp of additional easing next year. Interestingly, Powell also noted that the neutral rate is now higher than it was pre-pandemic, with the ‘long-run’ Fed Funds Rate projection raised to 2.9 per cent (vs 2.8% previously),” said the Emkay Global report.