Why does RBI’s position on rate cuts remain difficult despite rising possibility of Fed rate cuts in September?
Fed is no longer cryptic about its stance on rate action. In its Jackson Hole speech, it clearly signaled its intent to start cutting rates, potentially beginning with the September policy meeting. The bond markets and the US dollar index have reacted accordingly. The US 10-year yield has softened, and the dollar index has sharply dropped to a seven-month low, approaching the 100 level.
In light of such a dynamic shift, one would expect a corresponding impact on Indian G-sec yields. Contrary to these expectations, the Indian 10-year yield has remained steady, showing no signs of softening. This reluctance can be attributed to the fact that the RBI will have limited room to adjust its monetary stance, despite the potential leeway from the US Fed's policy shift. The key to understanding this lies in India’s unique inflation dynamics. Let’s explore this further.
When discussing CPI (Consumer Price Index) inflation, attention often focuses on its two distinct components: core and non-core. Non-core inflation, which includes food and fuel, is volatile and largely influenced by supply-side factors rather than monetary policy. In contrast, core inflation is driven by demand-side factors and is more responsive to changes in interest rates.
The Reserve Bank of India (RBI) began its rate hike cycle in May 2022, responding to rising inflationary pressures. Since then, the RBI has raised the repo rate by a total of 250 basis points (bps) across multiple monetary policy meetings. The current repo rate, as of the latest policy
