Finmin has an optimistic projection on the inflation trajectory, which, if shared by RBI, could signal a resumption of interest rate cuts earlier than expected. True, core inflation — filtering out volatile food and fuel prices and the metric that ratemakers watch most keenly — appears to have been tamed as the commodity cycle has turned. This is expected to continue as the global economy continues to cool, in addition to geopolitical developments that could cause energy and shipping costs to rise. Episodic food inflation drew rapid supply responses from GoI, although their effects are debatable. Export bans on rice and wheat had insufficient impact on inflation in cereal prices.
India has less reason to synchronize its rate-cutting cycle with the rest of the world than it had during the concerted “upward shift.” It has had a relatively shallow climb in interest rates post-Kovid and will have an equally shallow dive to negotiate. Economic growth has been remarkably resilient, and India will want to use this to its advantage to extract a greater share of global capital. This imposes a limit on its interest rate moves against advanced economies, where the markets expect rates to start coming down later this year. But interest rates in the US will have to come down considerably to reach their historic difference with those in India. There is a possibility that interest rates in advanced economies will settle somewhat higher after the rate-cutting cycle than they were before the pandemic. Against this backdrop, Indian policymakers will try to fuel a revival in private investment demand through cheap credit. There are indications that investment is replacing consumption, which is putting the economy on the road to recovery. RBI’s timing for interest rate cuts is likely to be driven by the transition in domestic demand more than by developments in the external environment. A government embarked on a multi-year capex program would like to see lower interest rates sooner to rally in private investment.