RBI Rate Cut Deferred to 2025 Amid Fed's Hawkish Signals

The Reserve Bank of India (RBI) is expected to delay its rate cut cycle until April 2025 due to the Federal Reserve's hawkish signals and global market volatility. The decision arises amid concerns over INR depreciation and inflation risks, impacting India's economic growth momentum.

The Reserve Bank of India (RBI) might delay the commencement of its rate cut cycle until April 2025, influenced by the Federal Reserve's shift towards a more hawkish monetary stance, according to Yes Bank's research report. The report suggests that the weakness of the Indian Rupee (INR) and emerging financial market volatility could lead to the rate cut cycle starting later than initially expected.

The Federal Reserve's recent reduction of its policy rate by 25 basis points was accompanied by a scaling back of projected rate cuts for 2025 to just 50 basis points, a decrease from the previously anticipated 100 basis points. Federal Reserve Chair Jerome Powell hinted that the decision to cut rates in December was closely scrutinized, indicating a near-neutral stance in monetary policy despite its current restrictive nature.

The Fed's decision carries significant implications for global financial markets. The Fed watch tool indicates no anticipated rate cut for January 2025, pointing towards a slower pace of monetary easing. This has bolstered the US dollar and raised US Treasury yields, posing challenges for emerging markets' central banks, including the RBI, amid considerations to ease monetary policies to stimulate growth.

The report underscores the complex balance the RBI must navigate between fostering domestic growth and managing inflation risks. The depreciation of the INR and increasing financial market volatility add to the challenge. The report asserts, "RBI will now have to juggle domestic growth imperatives alongside keeping inflation risks at bay."

This postponement could influence India's growth path, as businesses and consumers may endure prolonged higher borrowing costs, potentially limiting economic momentum in the near term. The Monetary Policy Committee (MPC) of the RBI has sustained the policy repo rate at 6.5 percent over the last 10 meetings. Newly appointed governor Sanjay Malhotra is set to unveil the next monetary policy in February 2025.

(With inputs from agencies.)