Sticky inflation reason why RBI refusing to cut interest rates?

The Reserve Bank of India (RBI) is expected to delay any rate cuts, with Elara Capital predicting that the Monetary Policy Committee (MPC) will maintain the policy repo rate throughout 2024. The brokerage firm now anticipates the first rate cut in the fourth quarter of the financial year 2025 (Q4FY25), a revision from their earlier expectation of Q3FY25.

Several factors contribute to this outlook. Elara Capital highlights the “repricing of US inflation risks to the upside and growing uncertainties over the Fed’s policy course,” which have strengthened the US dollar and US treasury yields. This situation poses challenges for emerging markets, including India. Additionally, recent geopolitical tensions and positive macroeconomic data from China have driven up commodity prices. Domestically, a healthy growth outlook and persistent food inflation due to unpredictable weather remain significant concerns.

Three main factors could delay the RBI’s rate cut:

The Fed Factor: If the US Federal Reserve begins reducing rates in the third quarter of this year, it could give the RBI room to start its rate-cutting cycle. Conversely, if the Fed holds rates, the US dollar could strengthen further, prompting the MPC to also hold rates.

Commodity Price Risk: A sustained revival of China’s economy and rising geopolitical tensions could push commodity prices higher, complicating inflation control efforts. While Elara sees geopolitical events as transitory unless severe actions occur between Israel and Iran, the impact on industrial metal prices requires attention. Despite this, the effect on India’s CPI might be muted due to the CPI basket’s composition and limited fuel price hikes during the election season.

Robust Growth and Sticky Food Inflation: With India’s GDP growth projected at a strong 7% for FY25E, the RBI has enough leeway to keep rates at 6.5%. However, food inflation remains a concern. Rising temperatures across India could keep food inflation high, and although a normal monsoon is forecasted, its uneven distribution poses a risk.

Elara Capital believes that in the first half of FY25, the RBI MPC will likely focus on global developments unless significant domestic growth shocks emerge, which currently seems unlikely.