Developed economies lead the global race to ease monetary policy, for now
Expert view: RBI may implement shallow rate cut even if US Fed defers, says Rajani Sinha of CareEdge Among developed economies, the European Central Bank, Bank of Canada and the Swiss National Bank have started trimming interest rates. The usual trendsetter for global monetary policy decisions, the US Federal Reserve, is still in a wait-and-watch mode. As for emerging markets, key central banks such as the Reserve Bank of India (RBI), Bank of Korea, Bank of Indonesia and People’s Bank of China are maintaining the status quo on key lending rates.
But for how long? In India’s case, the recently released minutes of RBI’s June policy meeting point to a growing divide between members of the Monetary Policy Committee. Two external members voted for a 25-basis-points interest rate cut and a change in stance in June, versus just one in April. One basis point is 0.01%.
Heat waves in various parts of the country have increased the risk of a further rise in food prices in the near term. The progress of the monsoon will be a key determinant of the food-inflation trajectory and therefore the timing of the interest rate cut. Also read | Data explainer: Decoding the dissent of RBI’s doves, in 5 charts According to economists at Vanguard Group, the strength of the US economy has forced the Fed to maintain its peak for longer.
“Other central banks cannot delay policy normalisation much longer, given domestic economic weakness," they said in a note on 25 June. That said, this policy divergence may be temporary – once the Fed starts cutting rates, the policy directions of key central banks will be in alignment. Until then, though, movements in foreign fund flows need to be monitored.
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