The Reserve Bank of India (RBI) is expected to maintain its current interest rates at the upcoming December 6 meeting, as surging consumer inflation has prompted economists to delay their forecasts for a rate cut to February 2025. This shift comes after a sharp rise in annual retail inflation, driven by escalating food prices, pushed figures beyond the RBI’s 6% tolerance ceiling in October.
Inflation Pressures Dominate Policy Outlook
RBI Governor Shaktikanta Das, whose tenure is likely to be extended, has emphasised the risks of premature rate cuts. Despite the central bank adopting a ‘neutral’ monetary policy stance in October, Das has remained cautious. “Any premature move to lower rates would be risky,” he stated, resisting calls from government ministers to ease monetary policy to support the slowing economy.
Economists in a Reuters poll conducted between November 18 and 27 overwhelmingly agreed with this cautious approach. Out of 67 respondents, 62 forecast that the RBI would hold its key repo rate at 6.50% during the December 4–6 meeting, with only five predicting a 25-basis-point cut.
This represents a significant shift from a previous poll, where a slim majority had anticipated a December rate cut to 6.25%.
The Inflation Dilemma
October’s inflation spike, driven primarily by soaring vegetable prices, has heightened the RBI’s vigilance. Historically, the central bank has tended to overlook transient spikes in food prices. However, HSBC’s chief India economist, Pranjul Bhandari, noted a change in this approach. “Back-to-back inflation shocks seem to have made officials distrustful of quick disinflation in vegetable prices,” she remarked, adding that the RBI is likely to wait until February or April to ease rates.
This caution underscores the challenge the central bank faces in balancing inflation control with growth support.
Growth and Global Factors
India’s economic growth is slowing. The economy is projected to expand by 6.8% in the current fiscal year and 6.6% in the next, down from over 8% in FY 2023/24. Despite these headwinds, the RBI appears unwilling to act hastily, with economists forecasting a gradual easing cycle beginning in February 2025.
Median predictions from the poll suggest the RBI will cut rates by 50 basis points to 6% by mid-2025, followed by a prolonged pause until at least early 2026.
Global Comparisons and Challenges
The RBI’s cautious stance contrasts with more aggressive easing by other major central banks. The US Federal Reserve, for instance, is expected to cut rates in December and continue easing by at least 50 basis points in 2025. However, the global landscape presents its own complexities.
US President-elect Donald Trump, set to return to office in January, has proposed blanket tariffs of at least 10% on all imports. These policies could lead to higher global trade costs, potentially limiting the scope for emerging markets, including India, to reduce rates.
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“If the Federal Reserve’s rate cut cycle is shallower than expected due to expansionary fiscal policies and increased trade tariffs, it will constrain the pace of rate cuts by emerging market central banks,” warned Gaura Sengupta, chief economist at IDFC Bank.
Conversely, she noted that if domestic growth conditions deteriorate more sharply than anticipated, there could be room for more aggressive easing.
Long-Term Implications
The RBI’s conservative approach reflects its intent to ensure price stability before prioritising growth stimulus. Governor Das’s hawkish tendencies have shaped monetary policy in recent months, reinforcing a wait-and-watch strategy.
Shilan Shah, Deputy Chief Emerging Markets Economist at Capital Economics, observed: “If Governor Das stays on, policy loosening is not on the cards for now. However, evidence of cooling inflation in the months ahead could pave the way for easing.”
While the inflationary spike is largely attributed to temporary food price shocks, the RBI’s cautious stance signals its wariness of broader economic vulnerabilities.
As the RBI gears up for its December meeting, the message is clear: inflation control remains the top priority. Although economic growth is slowing, the central bank is unlikely to lower rates until early 2025, aligning with its cautious outlook. For businesses and consumers alike, this means navigating a high-rate environment for the foreseeable future, even as the global economic landscape evolves.
