RBI may delay plan to ease interest rates

The views expressed are those of the author and not necessarily of the of India (RBI).

The RBI has raised the by 250 basis points (one bps is 0.01 percentage point) since May 2022 as inflation surged way beyond the central bank's 4% target. But inflation is slowly aligning with the target, although concerns remain over the trajectory for food inflation.

Headline inflation, as measured by the yearly changes in the consumer price index or CPI, moderated to 4.8% in April 2024 from 4.9% in March, largely due to base effect. Food inflation, which accounts for more than 40% of the share in consumer inflation, edged up to 7.9% in April from 7.7% in March.

As for the , there is increasing optimism that India is on the cusp of a long-awaited economic take-off.

"Recent indicators are pointing to a quickening of the momentum of aggregate demand. Non-food spending is being pushed up by the green shoots of rural spending recovery," wrote the economists.

The report also highlights that at the global level, emerging market central banks will also likely have to follow the US Federal Reserve when the world's largest economy begins the cycle of rate easing.

Even as they think of easing policy rates, emerging market central banks face the pressure of weakening currencies. Sharp drops in the yen, yuan and won have complicated the outlook even further, prompting both verbal and forex sale defences, the authors said.

Increasingly, market expectations converge to the view that these central banks will not cut rates ahead of the despite high real interest rates. They state that they will not be 'Feddependent', but they will face practical limits on how far they can diverge from the Fed. Consequently, the rate easing cycle may turn out to be shallower than initially anticipated, they said.