RBI expected to hold policy rates in October despite Fed rate cut, experts say

The Reserve Bank of India (RBI) is anticipated to keep the repo rate unchanged at 6.5% in its upcoming October 2024 meeting, despite the recent interest rate cut by the US Federal Reserve.

The Fed reduced its policy rate by 50 basis points (bps), bringing it down to 4.75-5% for the first time in four years.

However, the RBI is expected to focus more on domestic factors, including inflation and economic growth, than to mirror the Fed's move.

In its last meeting in August too, the Indian central bank had kept its rate unchanged for a ninth consecutive meeting citing persistent food inflation as a significant threat to retail inflation. 

Analysts say food inflation is expected to remain elevated in September, diminishing chances of a rate cut.

Also, 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. 

Sonal Badhan, Economist at Bank of Baroda, noted,

RBI to consider domestic inflation dynamics

Analysts have highlighted that the RBI’s decision will be based on the current inflation trends and domestic risks.

Consumer Price Index (CPI) inflation fell below 4% in July and August due to base effects, but it is expected to rebound in September.

ING Think predicted that the central bank would likely maintain its stance in October, waiting for more clarity on inflation risks.

Rahul Bajoria, Head of India and ASEAN Economic Research at BofA Securities India, stated,

SBI Funds Management noted that the RBI is likely to maintain its focus on domestic challenges, particularly the misaligned credit-to-deposit ratio within banks and persistently high food inflation.

"Key indicators suggest that monetary easing in India is still some distance away. These include: a) the 60 bps upward revision in the Q2FY25 CPI forecast; b) the clear emphasis on the role of food inflation in shaping overall inflation expectations; c) ongoing difficulties in securing stable long-term deposits within the banking system; and d) the July OMO sale to keep the overnight rate in line with the repo rate," the report stated.

Rate cut likely in December if inflation risks ease

While some analysts had predicted a twin rate cut of 25 bps each starting in October, others, like IDFC First Bank, believe the first cut may occur in December 2024.

IDFC analysts expect inflation to ease as food supplies improve after the monsoon season, potentially allowing the RBI to shift its stance to neutral by year-end.

However, they warned that inflation pressures, particularly from rising vegetable prices, remain a risk in the short term.