Fed pivot or not, RBI likely to go its own way on rates, says I-SEC PD

Markets may speculate that the Reserve Bank of India’s decisions on interest rates are closely linked with the US Federal Reserve’s actions, but recent commentary by the Indian central bank suggests that Mint Road may now well and truly diverge from rate moves in the world’s largest economy.

“It is plausible to make the interpretation that RBI MPC may well pivot before Fed starts its own cutting cycle and that was the motivation for the statement... However, we believe the reason for this emphasis was the opposite based on other statements,” wrote economists from ICICI Securities Primary Dealership.

Last week, governor Shaktikanta Das stated that contrary to the view that the RBI follows the Fed, the Indian central bank plays the game according to the local weather and pitch conditions and that its actions are determined by domestic growth-inflation conditions.

“After all, these comments came after Governor noting that any softening in inflation in Q2 would be statistical and that RBI remains committed to aligning inflation with the 4% target on a durable basis,” ICICI Securities Primary Dealership’s economists wrote.

The central bank has continued to predict strong growth and is awaiting more clarity on food inflation as monsoon begins, while the core inflation has slowed down at 3.2% on year. Core inflation measures the cost of goods and services, excluding costs of food and fuel.

Some institutions, including UBS Securities, do not expect a rate cut in this calendar year citing strong growth.

“Growth is good; so the RBI does not need to do a rate cut. The only time a rate cut can happen is if growth or inflation decline,” said Tanvee Gupta Jain, Chief India economist at UBS Securities. “We are expecting a 50 basis point cut, but in CY 25,” she said. One basis point is 0.01%

The RBI’s growth forecast was upgraded to 7.2% from 7%, and inflation forecasts remained constant at 4.5%, mitigating the probability of imminent rate cuts. But the report attaches some probability to a scenario where growth could remain reasonably strong and inflation undershoots RBI forecasts, tracking close to 4% in the second half, opening the possibility of a rate cut.