The US Federal Reserve kicked off its monetary policy easing cycle with an oversized 50 basis points (bps) interest rate cut in light of the ‘progress on inflation and the balance of risks’. Citing inflation levels aligning with its target of 2% and the labor market getting balanced, the Fed Chair Jerome Powell-led Federal Open Market Committee (FOMC) reduced the federal funds rate to the range of 4.75% to 5%.
Despite the outsized rate cut, Powell emphasized that the economy remains in good health, and that 50 bps is not going to be the pace of easing going ahead. The dot plot is slightly more hawkish, with another 50 bps cut by end-CY2024 and a further 100 bps cut in CY2025. One basis point is equal to one hundredth of a percentage point.
This beginning of the easing cycle provides some space to Emerging Market (EM) economies to kick-start theirs too. Tracking the US Fed rate cut, the Hong Kong Monetary Authority (HKMA) cut its base rate charged via the overnight discount window by 50 bps to 5.25% and the Bank of Indonesia delivered a 25 bps rate cut earlier in the day.
HKMA said the US interest rate cut will have a positive impact on the economy and will provide some room for easing of local interest rates.
After the bumper US Fed rate cut, the Reserve Bank of India’s (RBI) monetary policy meeting next month will be eyed, with the domestic retail inflation rate at 3.65% in August, remaining within the central bank’s tolerance band of 2-6%.
However, economists believe that even though CPI inflation slid below the RBI’s 4% target, an immediate rate cut action by the RBI Governor Shaktikanta Das-led Monetary Policy Committee (MPC) in October is unlikely as the central bank will focus on domestic dynamics.
Certain economists expect a change in policy stance in the upcoming RBI policy, but a repo rate cut is only expected in December.
Madhavi Arora, Lead – Economist at Emkay Global Financial Services believes this outsized Fed rate cut has given EM Asia room to proceed with their own easing cycles, but expects the RBI to deliver its first repo rate cut in December.
“With the global market reaction having been muted thus far, the RBI still has flexibility to remain focused on domestic inflation and risk management. The RBI is likely to maintain its wait-and-watch stance and focus on being ‘actively disinflationary’, with a first rate cut likely by December,” Arora said.
According to her, the case for an early cut is still less likely, and she continues to see shallow cuts by both US Federal Reserve and the RBI in this cycle.
In its third bi-monthly Monetary Policy for FY25 on August 8, the RBI Governor-led MPC left benchmark repo rate unchanged at 6.5% for the ninth straight meeting, and maintained the policy stance of ‘withdrawal of accommodation’.
Purvi Mundhra, Economist at Systematix expects RBI to consider adopting rate easing in 2025 only, however, the quantum would depend upon how the Credit-Deposit ratio declines along with the inflation trajectory.
“We do not expect the RBI to follow the rate cut cycle initiated by the Fed immediately. Currently, the MPC decision is confounded by concerns over food inflation gaining core-type elements and erosion of household savings impacting the growth prospects of banks that need to bring down the high Credit-Deposit ratio driven by high retail lending. Thus, adopting monetary easing would be inconsistent at the moment,” Mundhra said.
A team of economists at Kotak Institutional Equities also believe that the RBI should be able to continue focusing on the domestic dynamics and can change the policy stance in the next meeting.
“Comfortable domestic inflation and benign global conditions should assist in changing policy stance in October to ‘Neutral’, especially as liquidity conditions have been allowed to be comfortable. We maintain our call of a shallow rate-cut cycle (75-100 bps) starting in December as inflation moves toward 4% in FY2026,” said Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities.
Coining similar views, Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings & Research said while RBI is likely to take an independent view on any interest rate action in India, the strong rate cut from Fed may have increased the likelihood of a 25-bps cut from the MPC in December 2024, provided however, there are no fresh surprises on the food inflation front.
On the contrary, Rishi Shah, Partner at Grant Thornton Bharat, believes that the probability of a cut in the repo rate in October has increased by a margin, given the larger-than-anticipated cut by the FOMC.
Overall, while the US Fed’s aggressive 50 bps rate cut has set a potential precedent for Emerging Market economies, the RBI is expected to maintain its focus on domestic inflation and economic dynamics.
Economists predict that a rate cut may not occur until December 2024, with a minimal chance of shift in policy stance likely in October. The cautious approach reflects concerns over food inflation and household savings, keeping India’s monetary policy more conservative despite the Fed's action.
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