Despite the unusual optimism in the markets over slashing of key interest rates in the coming quarters, all signals coming from economic conferences and high-level deliberations tell that caution remains the buzzword for the central banks. While the International Monetary Fund (IMF) has warned central banks against fuelling market hopes for rapid interest cuts, the Reserve Bank of India (RBI) has flatly ruled out cuts in repo rate in financial year 2024-25. The voices emanating from the high tables affirm that the need for central banks is to move cautiously on the inflation front and the markets to tread accordingly instead of harbouring false hopes.
The RBI has kept the repo rate unchanged at 6.5 per cent for the last five months after a 250 bps hike in the earlier months. The status quo was hailed by the markets but there were also hopes of a rate cut fuelled by the optimism shown by the US Fed. At the moment, though, the optimism seems misplaced as articulated by the IMF and back home by the RBI. The central bank Governor Mr. Shaktikanta Das, in fact, took the direct approach to spell out the actual picture that the markets would see in the forthcoming quarters. He termed all the talk of cuts in key policy rate as “premature” while clarifying that the topic was not even on the discussion table of the central bank’s Monetary Policy Committee (MPC) scheduled to meet in February. It is another indication of the MPC recommending further status quo in the current repo rate.
Caution remains the key for all top economies in times where inflation can rear up due to multiple geopolitical factors. Some countries, including India, have managed the situation really well with proactive policies and infusion of capital expenditure. India’s consumer price index (CPI) inflation has also moderated from 7.8 per cent to 4.5 per cent, well within the RBI’s band of 2-6 per cent. However, the current geopolitical situation, emerging flashpoints and low agricultural produce might still play a spoilsport. The uptick in inflation in December is a case in point. For lowering of interest rates, inflation must align with the target by the second quarter of 2024-25 and remain anchored there as projected in the RBI’s bulletin.
Similar caution has been sounded by IMF Chief Ms. Kristalina Georgieva as she advised central banks to avoid premature tightening in hope of taming inflation soon. Any such policy move would wipe out all the progress achieved so far in these testing times. Average inflation might have decreased in many parts of the world but the economies were dealing with one major disruption at that time in the form of the Russia-Ukraine conflict. Newer discrepancies have emerged since then as another military conflict -- Israel and Hamas -- is treading a similar unending path. Adding to the worries are the drone and missile attacks by rebel groups on cargo vessels in the Red Sea and Gulf of Aden. Both are critical maritime routes for transport of shipments and continued disruption due to armed conflicts would severely upset the global economic situation, yet again. The world is still reeling under crude oil prices and low yield due to climate change. Further escalation in geopolitical tensions will definitely scuttle planned economic policies of all the central banks.
Going ahead, the focus has to be on micro and macro data to regulate impending dangers. The last mile is certainly “very, very tricky” as warned by Ms. Georgieva. India has its task cut out -- to sustain the momentum of economic growth while bringing down retail inflation to 4 per cent. There is simply no room for policy errors.
(The Hitavada).
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