Waiting for a rate cut? Not yet, says RBI governor

There is no possible reduction of interest rates in the near term, Reserve Bank of India governor Shaktikanta Das has indicated. A statement from the governor in London on June 13 made it clear that the disinflation process is going to be gradual and lengthy, and in the process, reaching the retail inflation target of 4% can only happen in the medium term.

While delivering the plenary address at the Central Banking Summer Meeting, Das said, “The cumulative impact of our monetary policy actions over the last one year is still unfolding and yet to materialise fully. While our inflation projection for the current financial year 2023-24 is lower at 5.1%, it would still be well above the target.”

Given the RBI’s projection of 5.1% retail inflation projection in FY24, analyst think that any possible rate cut might take place in FY25, or Q4 of FY24 at the earliest.

During the speech in London, the RBI governor also explained how in a country like India, the central bank cannot be indifferent to growth concerns while shaping the monetary policy.

Significantly, the retail inflation in India moved to a 25-month low level of 4.25%, which was below the estimates at 4.4%. The inflation stood at 5.66% in March and 4.7% in April.

Acknowledging the deceleration in inflation, the monetary policy committee of RBI went for a pause in the hike of policy rates in its successive meetings in April and June.

Last week, the RBI governor said that though the target band of inflation is 2-6% for them, they would target nothing more than 4%. He also said that there were risks in handing out specific guidelines in providing future indication for any terminal rate. A terminal rate is the interest rate that is consistent with a balanced economy in the long term.

He also explained that during the pandemic RBI tried to balance growth needs and, therefore, tolerated inflation beyond 4%.

“Given our population and large addition to the workforce every year because of the ‘demographic dividend’, we cannot be oblivious to growth concerns. Hence, we prioritised growth during the pandemic even as inflation remained above the target but within the tolerance band,” said the RBI governor.

He said that the lesson of handling multiple crisis in the past few years was the primacy to remain nimble-footed and flexible.

Soumya Kanti Ghosh, the chief economist of State Bank of India told The Times of India that he was tentatively expecting a rate cut only in Q4 of the current financial year. He also hoped that the cut could be higher than 25 basis points.