US Fed Cuts Rates by 50 bps: Will RBI Follow?

The U.S. Federal Reserve‘s recent decision to cut interest rates by 50 basis points (bps) has sparked discussions about the Reserve Bank of India (RBI) potentially following suit.

This marks the Fed’s first major rate reduction since the early COVID-19 days, aimed at addressing economic challenges.

Impact of the Fed’s Rate Cut

Monetary Policy Shift: The Fed’s cut indicates concerns about economic stability. Lower borrowing costs may boost U.S. consumer spending and investment, but it also signals significant economic worries.

Will RBI Follow?

Current Economic Context

RBI’s Rate: The RBI has held its repo rate at 6.5% since early 2023, focusing on managing domestic inflation.

Possible Rate Cuts:
- Immediate Cuts: Some experts predict the RBI might cut rates by 25 to 50 bps as early as October 2024, given that consumer price inflation is below the RBI’s 4% target.
- Cautious Approach: Others believe the RBI may wait until December 2024 or later, due to ongoing food inflation concerns.

Historical Trends

The RBI has often aligned with the Fed during major policy shifts. If the Fed continues cutting rates, the RBI might be pressured to do the same to support growth and maintain competitive rates.

Sectoral Impacts

Beneficiaries: Sectors like infrastructure and banking could benefit from RBI rate cuts.

Challenges: Banks may face short-term issues with lower deposit rates affecting their CASA (current account savings account) base.

The RBI’s rate decision will likely depend on domestic inflation and economic conditions. Upcoming Monetary Policy Committee meetings will be crucial for India’s monetary policy amid global shifts.