Why The RBI Is Not Keen To Follow The Global Interest Rate Cycle

The Reserve Bank of India maintained the repo rate at 6.5% for the eighth consecutive time after the Monetary Policy Committee meeting in June. In contrast, central banks in various other countries have taken a different approach. Both the European Central Bank and the Bank of Canada have initiated a rate-cut cycle. Meanwhile, the US Federal Reserve, after its June policy meeting, kept the benchmark interest rates steady at 5.25% to 5.50% for the seventh consecutive meeting, aligning with Wall Street expectations.

“The compulsions to move to a rate cut are very different for the Western countries. When you compare it with India. Now, ECB (European Central Bank) cut rates mainly because it needs to shore up the European economy and inflation also, they don't have much respite from inflation,” Brinda Jagirdar, former chief economist at the State Bank of India (SBI) told The Core.

RBI Governor Shaktikanta Das has remained firm that the rate-setting committee would focus on domestic conditions when making rate cut decisions, and not follow the US Federal Reserve. The central bank has maintained its forecast for robust growth and is seeking further clarity on food inflation as the monsoon season commences.

Despite easing consumer inflation, the RBI would continue to remain cautious due to ongoing global uncertainties and potential supply chain disruptions. As other central banks navigate their unique economic challenges, India's strategy remains focused on internal stability and growth.

Growth Vs Inflation

India’s Consumer Price Index (CPI)-based inflation in May, eased to 4.75%, a 12-month low. The inflation rate was 4.83% in April. However, food inflation remained elevated, although there was a minor sequential drop. The Consumer Food Price Index (CFPI) inflation came in at 8.69%, down marginally from 8.70% in April 2024.

The RBI has aimed to control inflation pressures without hindering growth. Although CPI inflation has been within the central bank’s comfort zone for several months, the approaching monsoon season might prompt the Monetary Policy Committee to adopt a cautious approach. The RBI has raised the GDP growth projection for the current fiscal year to 7.2% from 7%, citing increased private consumption and a resurgence in rural demand. RBI Governor Shaktikanta Das noted that estimates from the National Statistical Office peg India's real GDP growth at 8.2% for 2023-24.

“Growth is holding up very well, and given the traction for manufacturing infrastructure reforms. So all this is going to take growth forward. So we don't need that push from the rate cut to keep the growth momentum going. That so far as growth is concerned, and when it comes to inflation because that's what the Reserve Bank is watching more closely,” said Jagirdar.

However, she cautioned that with India becoming more dependent on the global supply chain, inflation could be affected due to global challenges like geopolitical tensions.

“Now we are getting more and more dependent on the global supply chain. So as far as our manufacturing is concerned—whether it's electronic, defence, any manufacturing—any disruption in trade and supply routes could affect us and then increase inflation. So I think that's where the Reserve Bank is going to be a little watchful,” added Jagirdar.

Regarding global economic growth, Governor Das has said that growth momentum has been steady in 2024 and is expected to stay resilient, bolstered by a recovery in global trade. Additionally, while global inflation is decreasing, the final phase of this disinflation process may prove challenging.

"I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions," Das had said.

RBI Unlikely To Follow Central Banks

Apart from the ECB and the Canadian Central Bank, some major central banks around the world now are leaning toward lowering interest rates. Central banks in smaller economies, including in Sweden, Switzerland, Hungary, and the Czech Republic, have already cut rates. The Bank of England’s policymakers are scheduled to meet on June 20, but it’s not clear whether the governing board will lower the benchmark rate from 5.25%.

Although the Fed kept its rate unchanged, Shaktikanta Das denied any influence of the Fed's decision on Indian monetary policy. In the April monetary policy meeting, Das said that the central bank's rate actions are strictly driven by domestic factors, not by the US Federal Reserve. On April 5, during a post-monetary policy press conference, Das reiterated that the RBI's rate actions have sometimes even anticipated those of the US Fed.

“They (countries that cut rates) need to shore up their economy, so, therefore, they have a compulsion, in my view, to cut rates. So that's what the ECB has done. But the thing is that in India's case, I would not go so far as to call it decoupling, but I would just say that right now, our situation is different. Now, in India's case, yes, first of all, we will need to move away from this withdrawal of accommodation,” added Jagirdar.

According to economists, there are a lot of global uncertainties that RBI has to contend with. It will be on a wait-and-watch mode for a while. During the pandemic, inflation surged globally, leading countries to raise interest rates in a synchronised manner. However, now the rate hike cycle and synchronised central bank actions are ending.

“ Now what we are seeing is that it's the end of the rate hike cycle. But the different countries are going to respond differently depending on their domestic conditions. It's not going to be synchronous. We've already seen the two most connected parts of the world acting differently. The US is talking of higher for longer, whereas Europe has already started cutting rates because their growth rate is anaemic,” Dharmakirti Joshi, chief economist at CRISIL-And S&P Global Company said in an interaction with The Core.

All Eyes On The Monsoon

While India has been able to control the overall retail inflation rate, food inflation has continued to be a consistent challenge for the past few months as it has been above 8% for a longer duration. The CFPI inflation came down marginally in May. Irregular monsoons, extreme heat waves, and the El Nino effect impacted crop production significantly leading to food inflation.

“Let's not forget that food inflation is still high and it could spread into general expectation, and then the CPI, and we don't know how the monsoons are going to pan out,” Jagirdar said.

While CPI-based inflation has decreased currently, it is expected to rise slightly in July or August. This increase will likely be followed by a decrease, settling around 4.5% by the end of the year. According to experts, while inflation is not such a big concern, the risk persists due to the impact of climate change on agriculture.

“Given that the frequency of heat waves is only increasing, given that monsoon patterns are changing, I think it's bound to have an impact on agriculture. When the heat goes up, even the pest attacks increase because their metabolism goes up. So, I think you need to have more crops that are resistant to these patterns,” said Joshi.

Within food, upward pressure remains in vegetables, pulses, cereal, eggs, and meat. Continued pick-up in vegetable prices, pulses, and cereals, reflect the impact of heatwave conditions.