Why the RBI might now postpone the rate cut and what it could mean for the investors.

The News

U.S. Fed has done it again: On November 7th, it cut the interest rate by 0.25%. It is the second rate cut followed by a 0.5% cut in September.

Some of the financial institutions in India have shifted their stance on rate cuts after the latest developments. Let’s break down what has changed and what RBI could do going forward. Before that, let’s quickly understand how interest rates affect our lives and the economy at large.

How do interest rates affect our economy?

When interest rates are low, people and businesses borrow more. It boosts spending and increases the overall demand, resulting in higher economic growth. It also leads to higher inflation as the money supply increases.

So how do you counter higher inflation? By increasing the interest rates.

Higher interest rates mean people borrow less and postpone their big spending and businesses delay their expansion. It cools down the economy by reducing the money supply.

Central banks adjust interest rates to either encourage growth or slow things down, aiming to keep prices stable and the economy balanced.

What’s the market view on RBI’s rate cut?

Initially, the market expected the RBI to cut interest rates in December this year. However, the outlook has shifted. For instance, HSBC originally predicted a December rate cut but has now shifted its forecast to February 2025.

What about inflation in India?

India’s overall inflation increased to a nine-month high in September to 5.49% from 3.65% in August. And I’m sure you would have witnessed increased vegetable prices lately, as food inflation rose to 9.24% in September, compared to 5.66% in August.

RBI has set the inflation target level at 4% with a tolerance band of ±2%. This means the RBI’s acceptable inflation range is between 2% and 6%.

During a recent event, the RBI governor mentioned that October inflation numbers could again be on the higher side, perhaps higher than the September numbers.

So, as of now, inflation is already on the higher side, leaving no room for rate cuts.

In other news, Donald Trump, during his previous term, reduced the corporate tax rate from 35% to 21%. With a second term, he may push to lower it further to 15%.

This means more money in the hands of people and businesses. It could further increase spending and with that, inflation might also start rising.

How does it concern India, you ask?
Well, USA contributes one-fourth to the global economy, and a boost in U.S. spending could have a spillover, affecting global economic activity, including in India.

To Conclude

Low interest rates with already high inflation mean even higher inflation. Soon, the RBI would be left with no other choice but to increase interest rates. So better leave the interest rate as it is and wait for the situation to evolve.