RBI likely to hold rates in December despite US Fed’s rate cut: Here’s why

The US Federal Reserve’s recent decision to lower its policy interest rate by 25 basis points (bps) to 4.5%, the second cut this year, has led to speculation on whether the Reserve Bank of India (RBI) will follow suit in December. While the RBI is known to keep a close eye on global monetary policy shifts, experts suggest the RBI will likely maintain the status quo to prioritise domestic inflation stability and financial market resilience.

RBI’s key considerations

Inflation remains a central concern for the RBI, with recent upward pressures resulting from higher food prices due to an extended monsoon season and crop damage.

While inflation has moderated in recent months, continued pressure on the rupee and rising import costs could further fuel inflationary risks.

Economists argue that while the Fed’s decisions typically influence emerging markets, the RBI may diverge from the Fed’s path.

Madhavi Arora, Lead Economist at Emkay Global Financial Services, believes that although a shallower rate cut cycle could emerge in 2024, the RBI’s immediate focus remains on financial stability, especially given India’s bond and foreign exchange volatility amid global shifts.

Market reactions and economic indicators

The Indian market has been trading sideways in anticipation of the RBI’s policy direction.

Krishna Appala from Capitalmind Research notes that although the Fed’s actions could create some market volatility, RBI’s cautious stance aligns with its goal of mitigating inflationary pressures before considering rate reductions.

Rakesh Pujara, Founder of Compounding Wealth Advisors, adds that the central bank is likely to assess high-frequency indicators, including corporate earnings, consumption trends, and foreign investment inflows, to guide its decision-making.

Forecast and outlook for 2024

Analysts suggest that if inflation continues to moderate and domestic economic conditions improve, the RBI may consider rate cuts in early 2025.

Until then, the central bank is expected to focus on sustaining stability in the face of global economic uncertainties and aligning its policy decisions with India’s inflation and currency dynamics.