BS BFSI Summit: Economists prioritise local inflation over Fed policy

Most economists believe that the monetary policy would be more dependent on local factors such as food inflation than on rate changes by the US Federal Reserve.

 

At a panel discussion titled “Food or Fed”, Aditi Nayar, chief economist at ICRA, projected that any rate cuts in India would likely be limited to 50 basis points (bps), suggesting that the Reserve Bank of India (RBI) is less likely to mirror the Fed’s aggressive rate-cutting measures and instead would opt for a rate cut timeline that aligns with local economic needs.

 

“The timing of the rate cuts should very much be centred on what is appropriate in our own local context rather than upfronting it or frontloading it to line up with the Fed," she added.

 

 

Nayar emphasised the importance of local inflation factors like food and rent on inflation expectations. "Food inflation dominates households' perception of inflation," she said, explaining how essentials like groceries and rent play a significant role in inflation expectations within Indian households.

 

Soumya Kanti Ghosh, group chief economic advisor at the State Bank of India, acknowledged the dual importance of food inflation and global interest rate trends but pointed out that India's economy has shown resilience to external disruptions. Citing data from recent years, Ghosh argued that India’s currency and interest rates have increasingly aligned with domestic fundamentals rather than reacting solely to global fluctuations.

 

“Most of these numbers are now relatively immune to global developments because they have evolved over time,” he said, underscoring the view that India’s economic metrics remain stable in the face of international volatility.

 

In response to a query on food inflation, the Fed's influence, and India's stance on decoupling, Ghosh emphasised food inflation as a persistent and complex challenge in India. He noted that climate change factors such as unseasonal rains and temperature fluctuations, now a common part of daily life, make inflation-control particularly challenging.

 

"Food inflation has always remained an enigma in the Indian context, and it will continue to be so with climate factors now impacting our daily lives," Ghosh remarked. While food inflation trends are subject to ongoing debate, he added, they remain a significant and unavoidable component of India’s economic reality.

 

Ghosh also elaborated on the distinct nature of India’s rate-cutting approach, explaining that unlike coordinated rate increases with global economic responses in the past, rate cuts tend to be country-specific.

 

“If you consider historical patterns from 2008 onwards, rate increases have often been coordinated globally, but rate cuts are typically tailored to individual countries’ needs,” he said, reinforcing the RBI’s stance that any potential rate cut in India would be aligned with domestic conditions rather than mirroring the Fed.

 

L&T Chief Economist Sachchidanand Shukla took a contrarian view and highlighted the evolving landscape, noting that the US’s robust industrial and trade policies combined with its dollar dominance have global ripple effects. "This potent combination of US policies impacts market dynamics significantly, and the RBI can’t entirely ignore it," Shukla cautioned.

 

“Something has really changed with the US elections, and this has to be a part of the reaction function of central banks around the world. I don't think that the RBI can really ignore it. Yes, food is important, and has been important within the CPI (consumer price index) basket. But the underlying has changed, and some of this must go into the reaction function of even the RBI,” he added

 

From a global perspective, economists acknowledged the interdependencies but maintained that Indian policy would not replicate US strategies.

 

Samiran Chakraborty, managing director (MD) and chief economist at Citigroup India, stressed that while common factors like commodity prices and transportation costs influence all economies, central banks in emerging markets, including India, are not compelled to cut rates in sync with the Fed.

 

"When the Fed hikes (rates), there’s pressure to follow suit due to currency concerns, but the same isn’t true when the Fed cuts," he noted.

 

Ila Patnaik, chief economist at Aditya Birla Group, said it's the food, growth situation, and Fed at the moment that indicate a need to wait for rate cuts.

 

“With Trump coming to power, we don't know what exactly will come in. But if there are higher tariffs in the US, if there is inflationary pressure in the US, and if there is expansionary fiscal policy through tax cuts that he's been suggesting, then that really means that the Fed may slow down on its rate cuts and we may actually see a longer period of cautious wait,” she emphasised.

 

Looking ahead, economists remain cautious about rate cuts. Shukla expected the RBI to consider a maximum 50-bp rate cut early in the next calendar year. Nayar and Chakraborty too suggested this kind of rate cut in February 2025. Ghosh projected a 25-bp cut in February but also added that it could be April too.

 

Patnaik said if the Fed pauses its rate cuts, the RBI might delay further.