US President Donald Trump's tariff shock on India is complicating the central bank's interest rate decision on Wednesday, with some economists raising their expectations for a cut.
Before Trump's announcement, most economists expected no change in interest rates following the governor's cautious stance at the June policy meeting. The majority of economists surveyed by Bloomberg, 23 out of 34, still expect the Reserve Bank of India to hold this week, but a few banks have recently revised their forecasts.
Soumya Kanti Ghosh of State Bank of India Ltd., the only economist who correctly predicted the RBI's surprise larger-than-expected rate cut in June, and Dhiraj Nim of Australia & New Zealand Banking Group now predict a quarter-point rate cut on Wednesday to protect Asia's third-largest economy.
Since February, the RBI has lowered the benchmark repurchase rate by 100 basis points to 5.5%, including an unexpectedly large cut in June. Since then, inflation has fallen to its lowest level in more than six years, while Trump has imposed a 25% tariff on India and threatened additional penalties, clouding the growth outlook.
Last month, Governor Sanjay Malhotra stated that there was room for additional cuts, but the threshold for easing remains high. The central bank is also expected to maintain its "neutral" policy stance, allowing rate-setters to be more flexible in the face of global uncertainty.
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SBI's Ghosh said there's "no point" in delaying rate cuts now because inflation will remain below the RBI's 4% target this fiscal year and around that level next year. A front-loaded cut now would help boost holiday spending and credit growth, he claimed.
However, Ghosh believes the central bank should pause once the repo rate falls to 5.25%. The repo rate was at 5.15% just before the pandemic in February 2020, its lowest point to date. During the pandemic, the RBI reduced the key rate to 4%, but 5.15% should be the "rate floor" in normal times, he said.
Other economists, such as Aastha Gudwani of Barclays Bank Plc, made the case for further monetary easing. Other economists, including Aastha Gudwani of Barclays Bank Plc., said the case for additional monetary easing is "not yet compelling enough." Given the ongoing transmission of previous RBI cuts to bank lending rates, as well as trade negotiations with the US, the RBI "would choose to wait this policy out and let these events unfold, thereby keeping the powder dry," she wrote in a note to clients.
With the US Federal Reserve holding interest rates steady and putting additional pressure on the rupee, there is little incentive for emerging markets like India to ease policy further, analysts stated.
