Reserve Bank of IndiaThe Reserve Bank of India (RBI) could delay its expected rate cuts as pressure on the Indian rupee and rising currency intervention costs weigh on monetary policy decisions. Following recent moves by the US Federal Reserve, which upgraded its inflation expectations for 2025 and scaled back the number of expected rate cuts, India’s central bank faces tighter restrictions on adjusting interest rates.
The US Fed’s updated policy for December 2024 now predicts fewer rate cuts in 2025 – just two compared to the previously expected three. Together with an upward revision in the median projection for the Federal Fund rate by 40 basis points to 3.9%, these changes indicate a more aggressive stance from the US central bank. This, coupled with the Federal Reserve’s decision to hike 10-year US Treasury yields, indicates that the interest rate spread between India and the US remains the lowest in recent history.
Less attractive option
Against this backdrop, analysts believe that the RBI’s rate cuts, which were earlier expected for February 2025, are now uncertain. The widening gap between interest rates and global markets, combined with increasing pressure on exchange rates, makes a rate cut less attractive for the RBI. The falling value of the rupee and rising costs of currency interventions further complicate the situation.
In India, inflation concerns remain prominent despite a predicted fall in food prices. The overall inflation outlook remains high, especially as growth expectations rise in the second half of FY25 as the effects of elections and weather-related factors subside. The RBI has already cut the Cash Reserve Ratio (CRR) by 50 basis points to boost growth, but this may not be enough to offset global economic challenges and domestic pressures.
The dynamics of India’s external sector, inflation and growth prospects will shape the RBI’s policy actions going forward. Despite the challenges posed by global inflation and currency pressures, the RBI is expected to adopt a cautious approach as external economic factors may continue to influence domestic monetary policy decisions in the coming months, experts say.
