The US Federal Reserve recently cut interest rates by 50 basis points, bringing its federal fund rate to a range of 4.75-5.0%. This marks the first rate reduction by the Fed since 2020, with further cuts expected by the end of the year. Following the Fed’s move, many are now wondering if the Reserve Bank of India (RBI) will also consider lowering interest rates in its upcoming policy meeting.
No Rate Change by RBI in August: What’s Next?
In the RBI’s last Monetary Policy Committee (MPC) meeting in August, the central bank decided to keep the repo rate unchanged at 6.5%. The RBI is currently targeting 4% retail inflation, a number that fluctuated slightly in recent months. Retail inflation was 3.5% in July, rising marginally to 3.7% in August due to the increasing prices of food items.
While the Fed’s rate cut may seem like a signal for India to follow suit, the RBI has its inflation concerns to address. The upcoming MPC meeting in October will be crucial in determining the future course of action.
Food Inflation and External Factors Could Impact RBI’s Decision
Food inflation is expected to rise to 4.4% in the second quarter of FY25, which could significantly influence the RBI’s decision in October. An uneven monsoon and rising food prices are already putting pressure on inflation. However, good rains in recent weeks may help ease food inflation slightly.
Another key factor to watch is geopolitical tensions in the Middle East, which could drive up petrol and diesel prices. Additionally, any economic shifts in the US, such as a victory for Donald Trump in the 2024 presidential election, may affect global markets and influence the RBI’s policy stance.
India’s Slowing GDP Growth: How Will RBI Respond?
India’s GDP growth slowed to 6.7% in the first quarter of FY25, the lowest in the last five quarters. This drop is 40 basis points below the RBI’s estimate of 7.4%. Despite this slowdown, the central bank’s focus may remain on controlling inflation rather than boosting growth immediately. With retail inflation edging higher and external factors affecting prices, the RBI may decide to hold off on a rate cut in the upcoming policy.
October Monetary Policy: Will There Be a Rate Cut?
The RBI’s next MPC meeting is scheduled for October 7-9, and speculation is growing about whether it will follow the Fed’s lead and cut rates. While the Fed’s action could prompt some central banks to reduce rates, the RBI may remain cautious, given its focus on inflation control.
Although the likelihood of a rate cut in October seems low, experts suggest that the RBI could reduce rates by 50 basis points in two separate moves later in the year. For now, all eyes are on the inflation numbers and how external factors like oil prices and global tensions unfold in the coming months.
