RBI May Opt For Rate Cut Only In December

With the global market reaction having been muted thus far, the RBI still has flexibility to remain focused on domestic inflation and risk management

Even as Fed has cut rates by 50 bsp, the Reserve Bank of India (RBI) may go for rate cut in December, although there is no likelihood of any rate cut when MPC meets next month.

Deepak Ramaraju, senior fund manager, Shriram AMC says, “RBI will focus on the data and might likely undertake a rate cut in December. The FII flows can be outbound in the short term and as the US dollar starts easing, the flows can come back into India. The markets are expected to remain in range with positively biased.”

The US Fed cut the interest rate by 0.5 per cent for the first time in the last four years. Such high monetary correction was earlier undertaken only during the global financial crisis, indicating the severity of the economic stress the US is going through. Decadal high inflation and stressed labour market conditions were the preamble for such aggressive monetary correction, says a report by Emkay.

The main agenda was to prevent the economy from slipping into recession because of the “higher for longer” strategy adopted by the US Fed. The street expectation was divided on the rate cut between 25bps and 50bps. It was a surprise element for a few market participants. With this 50 bps rate cut, the Fed has to wait for the incoming macro data before taking the next monetary decision.

It's likely that future rate cuts might be lower and spread out. This will continue to add to uncertainty in the equity markets. The equity markets reacted negatively and ended in the red.

We can expect the broader Emerging economies to undertake rate-cut decisions. The RBI will focus on the data and might likely undertake a rate cut in December or 4Q FY 25, he said. In fact, the central bank still has room to prioritize domestic dynamics. This outsized cut has given EM Asia room to proceed with their own easing cycles, with the Bank of Indonesia delivering a 25bps cut earlier in the day. With the global market reaction having been muted thus far, the RBI still has flexibility to remain focused on domestic inflation and risk management. There are over 20 days before its next MPC meeting.

Madhave Arora, chief economist, Emkay says, “The RBI is likely to maintain its wait-and-watch stance and focus on being ‘actively disinflationary’, with a first rate cut likely by December.”

A case for an early cut is still less likely, and analysts continue to see shallow cuts by both Fed and the RBI in this cycle.