The Reserve Bank of India (RBI) is set to chart a course different from the US Federal Reserve as it most likely will continue with its pause policy on interest rates.

The Federal Reserve just announced lowering of interest rates by half a percentage point, its first in over four years since inflation started soaring after the outbreak of the Covid-19 pandemic. 

Americans are expecting a series of rate cuts from now on as price increases have showed signs of cooling and concerns are being raised about a possible economic contraction.

RBI Governor Shakikanta Das, however, has indicated that the time has not come yet for India’s central bank to cut rates. Despite retail inflation moderating to sub-4% for two consecutive months, Das has said “we still have a distance to cover and cannot afford to look the other way”. 

Though India’s retail inflation based on movement in consumer price index (CPI) has fallen from a peak of 7.8% in April 2022 to 3.65% in August, Das is cautious about easing monetary policy. He prefers inflation to be “durably reined in” before the easing cycle of interest rate starts.

There are, however, differing voices on this, even within the rate-setting monetary policy committee (MPC) of the RBI. Jayanth R Varma and Ashima Goyal, two external members of the committee, voted for a cut in the repo rate by 25 basis points at the last MPC meeting on 8 August while flagging growth concerns. The six-member MPC, though, kept the repo rate unchanged at 6.50% for the ninth time in a row citing inflationary concerns.

Varma, a professor of finance at the Indian Institute of Management, Ahmedabad, has spoken about India growing below its potential growth rate, induced by a monetary policy that is excessively restrictive. He has told media that the growth sacrifice of 0.75% or 1% could last not for one but for two years.

Goyal, a professor at the Indira Gandhi Institute of Development Research, has also maintained that high interest rates could stifle growth. In the backdrop of some central banks beginning to ease their monetary stances in response to slowing growth, she has cautioned against India falling behind even as inflation appeared to moderate.

Despite these minority voices, the RBI’s green light to an interest rate cut will take time to appear. Until then, the cycle of higher consumer borrowing costs, deposit rates and tight liquidity management is set to continue. A thought process parallel to this will run, which feels growth is being squandered by higher interest rates.

The RBI derives comfort from the fact that inflation in recent months has moved into the tolerance band of +/- 2% around the target of 4%. But that is not reason enough for the RBI to make a quick U-turn on interest rates. The main worry is food inflation, which rose from July’s 13-month low of 5.4% to 5.7% in August and crossed the 6% mark in rural India. Incidentally, prices of food account for nearly half of the retail inflation.

Besides upside risk to food inflation from uncertain climate developments, there is also concern about volatile crude oil prices on account of demand and geopolitical tensions. 

According to Das, monetary policies and growth scenarios across countries are diverging. In the midst of all this and an uncertain global environment, it is risky to offer forward guidance on interest rate cuts.

The RBI Governor’s thinking on the rate cut timing in India can be implied from his keynote address at the Future of Finance Forum 2024 organised by the Bretton Woods Committee. While recognising that market expectations of rate cuts are gathering momentum after indications of a policy pivot from the US Fed, Das said that the adverse spillovers from the ‘higher for longer’ interest rate scenario remains a contingent risk.

Das believes the momentum of global disinflation is slowing, warranting caution in easing monetary policy. The monetary policy management by central banks has to be “prudent and supply side measures by government have to be proactive”.

Central banks, he said, need to remain watchful of their domestic inflation–growth balance and make policy choices accordingly.

On the GDP side, Das is confident that India will achieve 7.2% growth rate in 2024-25. Earlier this month, he said at the annual FIBAC banking conference that fundamental growth drivers of the Indian economy, including private consumption and investment, are not slowing. “They are gaining momentum and this gives us confidence to say that the Indian growth story remains intact." 

Das has set focus on conquering the inflation battle, which the RBI has projected to ease from 5.3% in 2023-24 to 4.5% in 2024-25 and 4.1% in 2025-26. While stating that the balance between inflation and growth is currently well poised, the RBI Governor has reiterated the need to maintain price stability to support sustainable growth.

So, don’t expect the RBI to be in a hurry to reduce interest rates. India’s own rate-cutting cycle will start only when Das and his team feel inflation has been durably tamed to reside in the central bank’s target zone of 4%.