Fed there done that: Banks see delay in rate cuts by RBI, too

Federal Reserve Chair Jerome Powell Tuesday did not provide any guidance on when interest rates may be cut, saying instead that monetary policy needs to be restrictive for a longer period.

Economists are now factoring in a possible delay in policy rate cuts by the RBI, which has kept it unchanged since February 2023 at 6.5%. They were expecting the central bank to start lowering rates from the second half of FY25.

"The chair's comments confirmed that the Fed is likely to remain on a prolonged pause with US core inflation print coming higher than expected. The earliest the Fed rate cut cycle could begin would be September, as they would have five more CPI prints by then," said Gaura Sengupta, chief economist at IDFC Bank. "Against this backdrop, the start of the RBI rate cut cycle also gets delayed to October 2024. By October, there will be more clarity on Fed policy as well as domestic food inflation risks."

Agencies

From India's monetary policy perspective, a sustained slowdown in inflation, which is now trending closer to the RBI target of 4%, had raised hopes of an interest rate cut. But India's real GDP has grown by over 8% for three quarters now. Even if there is some slowdown in the coming quarters, the country is expected to outperform other emerging market peers. Strong economic growth pushes up consumption and accelerates inflation, but also lessens the need for rate cuts to push up economic growth.

Also, leverage pickup is accelerating, as reflected in higher credit growth at 16.3% in March 2024 compared with the pre-pandemic growth of 7.1% year-on-year. Moreover, escalated tension in West Asia is expected to push crude prices up and that could weigh on global inflation and the Fed's decision to cut rates.

"Strong growth in India has provided the RBI policy space to remain on hold, given the uncertainty on global factors," Sengupta said.

Productivity growth, a rising investment rate and inflation tracking above the target of 4%, alongside a higher terminal Fed funds rate, warrant higher real rates, according to a report by Morgan Stanley.

"As such, we now expect no easing in policy rates in 2024-2025 with policy rate steady at 6.5%, implying real rates to average 200 bps (basis points)," the report said.

Some economists are factoring in a possibility of a delay in their expectation of a rate cut by the central bank.

"While we maintain our call for a 50-bp rate cut starting in 3QFY25, we note increasing risks of further delays to the RBI's rate cuts from rising crude oil prices, a further push-back to the timing of the US Fed's rate easing cycle and volatile food inflation," said Upasna Bharadwaj, chief economist at .

IDFC Bank expects any decision on the start of rate easing only by October.

"By October, there will be more clarity on Fed policy as well as domestic food inflation risks" Sengupta said. "Strong growth in India has provided RBI policy space to remain on hold, given the uncertainty on global factors such as Fed and crude oil prices."

The progress of the monsoons will play a role in determining rate-reduction timelines.

"Reserve Bank is not expected to take any rate action until August. By then a clear idea on the progress of the monsoon and its impact on food grains production and inflation would emerge," said Madan Sabnavis, chief economist . "It would like to see how inflation pans out before taking any rate action."