RBI Signals Pause After December Cut as Inflation Pressure Edges Up
The Reserve Bank of India (RBI) is raising eyebrows with its December policy decision, indicating that the latest rate cut may signal the end of a recent easing cycle. As inflationary pressures rise due to increased commodity prices and a weaker rupee, the central bank is expected to maintain a cautious stance moving forward.
Economic Forecasts and Inflation Impacts
– Current CPI Forecast: The Consumer Price Index (CPI) for the ongoing quarter is projected at 3.2%, a noticeable increase from 2.9%.
– Policy Rate Status: The RBI’s Monetary Policy Committee (MPC) decided to keep the policy rate unchanged at 5.25% after reducing it by 125 basis points over the past year.
– Growth Projections: Proposed trade agreements with the USA, the European Union, and other regions have improved growth forecasts, alleviating the need for further rate cuts to stimulate growth.
Insights from Economists
– A survey conducted by Economic Times found that eleven out of fourteen economists anticipate no additional policy rate reductions in the near future.
– Amit Somani, Deputy Head of Fixed Income at Tata Asset Management, noted, The upward revision of inflation and GDP growth forecasts suggests that monetary easing may be largely behind us.
Key Indicators Driving the RBI’s Decisions
– GDP Growth Projections: The RBI has increased GDP growth forecasts for the first half of FY27 by 20 basis points, now estimating growth at 6.9% and 7% for Q1 and Q2, respectively.
– Inflation Concerns: Inflation projections have also been revised higher for FY26, now expected at 2.1%, up from 2.0%.
Ongoing Risks and Future Expectations
– Commodity Prices Influence: Rising commodity prices and a declining currency pose potential risks for inflation. Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, highlighted that uncertainties surrounding growth and inflation figures persist.
– A minority still speculates on the possibility of one final rate cut, suggesting that economic growth may falter once the new GDP base year is factored in. Elevated geopolitical tensions also pose risks to economic stability.
Conclusion
As the RBI stands at this critical juncture, the focus will be on balancing growth concerns with inflation pressures. The findings indicate a likely halt in monetary policy easing, with the potential for minimal adjustments going forward. As analysts weigh the implications of the new CPI and GDP series, all eyes remain on the RBI’s forward strategy in navigating these challenging economic conditions.