While the US Federal Reserve recently delivered a 50 bps interest rate cut, bringing its policy rate down to 4.75-5 per cent for the first time in four years, the Reserve Bank of India is still believed to maintain policy rates unchanged in the upcoming October meeting. Sonal Badhan, Economist, Bank of Baroda, said, “As we have previously seen, Fed action is more of a guiding factor for other central banks. Governor has also repeatedly clarified that RBI actions are based on domestic factors. We thus, continue to believe that RBI will maintain policy rates unchanged in the upcoming Oct 2024 meet. The earliest possibility of a rate cut emerges only in Dec’24, as MPC members are likely to monitor the impact of excess rains and food inflation before deciding to lower rates.”
“RBI is expected to maintain the status quo in the October policy, as inflation risks still persist. Daily retail prices still show upward pressure on vegetable prices in September. The policy space to remain on pause is provided by strong growth conditions. Monetary policy stance is expected to be retained (withdrawal of accommodation) in October, with RBI preferring to retain policy flexibility by not giving forward guidance,” IDFC First Bank said, while adding that the central bank is expected to cut policy rates and change stance to neutral in December, with food inflation pressures expected to ease as supplies improve. Overall monsoon distribution remains positive with more than 50 per cent of the country by area receiving normal rainfall.
Further, SBI Funds Management report maintained that the RBI could continue to focus on the domestic dynamics of misaligned credit to deposit ratio within banks and elevated food inflation. “The a) 60 bps upward revision to Q2FY25 CPI projection; b) the categorical reinstatement of importance of food inflation in overall inflationary expectations; c) the ongoing challenges within the banking system to secure sticky long-term deposit; d) OMO sale in July to keep the overnight rate aligned to repo are strong signals that monetary easing is comfortably some time away in India,” SBI Funds Management said.
Rahul Bajoria, Head of India and ASEAN Economic Research, BofA Securities India, said, “RBI is set to remain on hold, for the tenth consecutive MPC, keeping repo rate at 6.50 per cent. The guidance from RBI for near term growth and inflation dynamics remains upbeat, and that rules out any material risk of a change in monetary policy guidance in the upcoming October MPC meeting.
Going by the trends, the RBI does not move lockstep with the US Fed and takes into account a number of other domestic and global factors while deciding its monetary policy. “Historical data shows that most central banks move according to domestic conditions and are not necessarily linked with decisions taken by the Fed. As such, we do not expect RBI to change its course following this development and maintain our view that the earliest possibility of a rate cut is in Dec’24. We also believe the stance will be kept unchanged in the Oct’24 policy,” Sonal Badhan added. The RBI had last increased the policy rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.50 per cent, in the last quarter of FY25.
“Governor Shaktikanta Das in his recent speeches has been categorically pushing back on any near-term turn, disassociating RBI’s monetary policy from the US rate cuts, and talking up future growth prospects. This was further corroborated in the recent RBI bulletin, where RBI staff estimates show no growth slippage, and inflation being broadly on track to meet RBI’s growth and inflation projections of 7.2 per cent and 4.5 per cent for FY25, respectively,” added Rahul Bajoria.
Bank of Baroda analysed how other central banks moved, when Fed delivered a rate hike or a cut. Looking at the data for almost the past 10 years, it has been noted that while Fed action is an important guidance factor for other central banks, it is not a deciding factor. The decision to cut or hike rates is driven more by domestic factors.
How Fed moved? What helped?
The US Fed decided to lower the policy rate by 50bps in its latest meeting in Septmber 2024, bringing the policy rate down to 4.75-5 per cent. Before the meeting, analysts were split between possibilities of 25 bps or 50 bps cut, as macro data points provided mixed signals. On one hand, while the labour market was showing signs of cooling down, on the other hand, core CPI noted some build up in pressure in Aug’24. The Bank of Baroda report stated that non-farm payrolls in the US rose by 142k in Aug’24 (+114 in Jul’24) versus an estimated increase of 160k. Manufacturing sector saw a 24k decline in payrolls, following a 1k increase in the previous month. On the price front, while headline CPI followed the expected trajectory and rose by 0.2 per cent (MoM) in Aug’24, unchanged from Jul’24, core CPI inched up by 0.3 per cent from 0.2 per cent last month. Even headline PPI rose by 0.2 per cent, following flat growth in Jul’24.
In the press conference, Chairman Jerome Powell highlighted that since the Jul’24 policy meeting, the central bank took into account two inflation and employment reports (Jul and Aug), and a Quarterly Census of Employment and Wages (QCEW) report which indicated that past payroll numbers may get revised downward in the coming months. Further, Fed also got much needed support as CPI in YoY terms eased to 2.5 per cent in Aug’24, moving closer to their targeted 2 per cent mark on a durable basis. “Another reason for a super-sized rate cut was that the central bank didn’t want to be behind the curve. The Chair admitted that if inflation report was available at the time of Jul’24 policy then Fed might have opted for a rate cut earlier. The change in economic projections also supports their view. The bank now expects GDP growth at 2 per cent in CY24, down from 2.1 per cent estimated in Jun’24,” said Sonal Badhan from Bank of Baroda.