‘RBI to hold rates till it clearly sights Fed heading to cut’

Moody's: RBI to keep rates on hold until US Fed rate cuts more clearly in sight; India's export competitiveness faces challenges due to policy choices, preference for protectionist measures.

The Reserve Bank of India (RBI) will keep interest rates on hold until the prospect of rate cuts by the U.S. Federal Reserve are “more clearly in sight”, Moody’s Investors Service said on Thursday. adding that post-festival demand dynamics in India, which will likely sustain growth in the near-term amid weak exports, will depend on inflation and the lagged impact of monetary tightening,

While ample reserves, solid domestic growth and largely contained inflationary pressures offered the RBI space to calibrate monetary policy, the persistence of elevated external risks would constrain the central bank into keeping interest rates high, Moody’s observed in a research note.

It also noted that even as robust GST collections, auto sales and consumer optimism suggested urban demand was likely to stay strong during the ongoing festive season, rural demand, which has shown nascent signs of improvement, “remains vulnerable to uneven monsoons that could lower crop yields and farm incomes”.

Moody’s also said India’s pitch to become more export-oriented faces significant challenges due to its recent policy choices and preference for protectionist measures. The reforms needed to improve export competitiveness may also be “politically difficult” as that would involve reducing protection of businesses that have benefited from decades of restrictive domestic trade policies, which have kept out foreign competition, it noted.

“The IMF found that between 2008 and 2019 India significantly raised its imports tariffs on agricultural goods and manufactured goods, while also actively using non-tariff measures. India has also declined to join two regional free trade agreements, the RCEP and CPTPP,” the ratings major said in a report on South Asia.

“In the longer run, low trade openness will also weigh on growth potential and the ability to create jobs, adding to social risks… Bangladesh, India, Pakistan face greater challenges than Sri Lanka as young and growing populations necessitate the creation of significant numbers of jobs every year,” Moody’s added.