With the Fed having cut rates by 75 basis points between September and November 2024; and likely to cut another 25 bps in December, the big question is about the RBI? Will the RBI also cut rates? The RBI avoided rate cuts in October, and may most likely avoid rate cuts in December also. The RBI governor had expressed concerns about rampant food inflation; but there are other reasons too. Here is a quick dekko at the key macro data points in last 6 months. 

Data Source: MOSPI, DIPP, DGFT 

As you can see, the core sector (infra) and IIP data is not available for the latest month; which is because they report with a lag of one month. There are 3 broad ingredients that will go into the RBI rate decision viz. price stability, growth, and risk of imported inflation for the Indian economy. Let us look at proxies for each of these ingredients. 

A good proxy for price stability is the combination of retail and WPI inflation. In the last 3 months, the retail inflation and WPI inflation have shown a distinct uptrend. While the retail (CPI) inflation has been driven by higher food prices, it has surely hit household budgets. The higher WPI indicates that cost pressures for Indian companies could be elevated leading to lower operating margins. Growth had dipped in between, but does not seem to be a cause for concern yet. Regarding imported inflation, the trade deficit remains sticky at above $25 billion and that could push the current account deficit higher. In short, the risks of a rate cut, currently, outweighs any possible gains. 

While it is hard to predict the trajectory of RBI thinking, rate cuts in December 2024 look unlikely if you combine the current data and language of the last RBI MPC minutes. With high food inflation, rampant risk of imported inflation and limited growth risks; the RBI has neither the need nor the incentive to cut rates. By February 2025, there will be more data flows, but any rate cut in December monetary policy looks very remote!