Mumbai: Reserve Bank of India governor Shaktikanta Das ruled out a rate cut in the immediate future, given that headline inflation is expected to rise in October as well before it starts moderating.
Speaking at a fireside chat organised by Bloomberg wire agency on Friday, Das cautioned that rate cuts at this stage would be “premature” and risky.
RBI uses its key repo rate—the interest rate at which banks borrow from it—to manage inflation, which spiked to a nine-month high in September. A lower rate can spur borrowing, consumption and economic activity. But RBI has kept its repo rate unchanged at 6.5% for nearly two years despite the US Federal Reserve and the central banks of some other countries lowering their policy rates recently.
“Rate cut at this stage will be premature and can be very risky, when inflation is 5.2% and next print is also expected to be high, more so if growth is doing well,” said Das. “We will not miss the (global) party. We will wait and watch and join the party when inflation figure is durably aligned.”
Stubborn inflation
Das’s comments are the first public statement from RBI on inflation since the September data came in at a worse-than-expected 5.49%. RBI has projected inflation to rise in the third quarter to 4.8%, while keeping the fiscal year inflation target at 4.5%.
With increasing risks of rising food inflation and crude oil prices, economists too are no longer expecting a rate cut in December. That said, some are still holding on to expectations of a rate cut as growth indicators show signs of the economy slowing down and company profits have started weakening.
While the Reserve Bank of India kept its policy rates unchanged at its October policy meeting, it signalled that it may be preparing to ease the rate as it changed its policy stance to neutral.
But Das has repeatedly said that RBI wants to see inflation settling at around 4% on a durable basis before considering a rate cut.
RBI deputy governor Michael Patra in a speech earlier this week indicated that inflation is expected to align with the regulator’s target on a durable basis only next fiscal year.
Stress tests
Das also called for the need to undertake stress tests of private credit funds as he believes these funds may be posing a risk globally.
“At the global level, private credit is posing risks and every central bank and regulator should be looking into that, especially the quality of collateral and underwriting,” he said. “Resilience of private credit funds in a downward cycle is yet to be tested. There is a need to undertake stress testing of private credit fund in multiple hypothetical stress situations.”
Das also mentioned that RBI was not managing the exchange rate. Since the beginning of 2022, the rupee has depreciated against the dollar by 11.5%.
The Reserve Bank is more bullish about India’s growth prospects than the market consensus and even the government. Das last week kept the central bank’s economic growth forecast for the current fiscal year unchanged at 7.2%, while the government’s projection is a more subdued 6.5-7%.
