Risk of interest rate cut in 2024 amid high consumer inflation

- The calculations that low interest rates increase investment have been wrong many times

- Most of the data related to India's economy indicate that the country's economy is in a strong position

In the final meeting of the year 2023, Reserve Bank's Monetary Policy Committee (MPC) has not only maintained the inflation rate of 5.40 percent in the current financial year, but inflation has also been estimated to be 5.20 percent in the last quarter of the financial year i.e. January to March. Earth 2024 has started with high inflation projections. Inflation at the beginning of 2023 was 6.50 percent. After raising the interest rate in February 2023, the MPC has maintained the repo rate at 6.50 percent in five successive meetings.

In a statement issued after the MPC meeting held in the first week of December, Reserve Bank Governor Shaktikanta Das said that the decision to maintain the interest rate was taken on the basis of two main parameters inflation and GDP. Stating that our priority is to bring down the inflation rate instead of reducing the interest rate, he indicated that the interest rate will not be reduced in the short term. Regarding inflation, the governor said, "It is true that core inflation is coming down, but the short-term outlook is surrounded by the risk of consumer inflation."

Uncertainty in food prices will have an impact on the inflation outlook going forward. Das also said in the statement that high global sugar prices are a matter of concern. Inflation came down to 4.87 percent in October but rose again to 5.50 percent in November. Which is still higher than the Reserve Bank's target of four percent. Higher food prices have resulted in higher overall inflation.

To reduce the high inflation in the country after the Corona period, the Reserve Bank has increased the repo rate by two and a half percent to 6.50 percent from May 2022. The last increase was in February of the current year. After that, the repo rate has been maintained at the current level for five consecutive meetings. The Reserve Bank has raised its GDP estimate for the current full year to 7 percent from 6.50 percent after the September quarter of the current financial year came in stronger than expected at 7.60 percent.

Any rush to cut interest rates could prove dangerous. Those clamoring for a cut in interest rates are ignoring short-term increases in inflation due to volatility in food prices, noted a report prepared by RBI Deputy Governor Michael Patra and other RBI analysts. Votes that interest rates should be cut threaten the Reserve Bank's efforts to bring inflation back to its target.

The task of bringing inflation down to its target is not over yet. The Chairman of the American Federal Reserve, Jerome Powell, may have hinted at reducing the interest rate, but the analysts of the Reserve Bank are not in a mood to reduce the repo rate at home. He has stuck to his view of keeping interest rates high for a long time. According to analysts, inflation will not come down to the four percent target in the next financial year either. In the first quarter of financial year 2025, the retail inflation will be five percent, while the second quarter will be 4.70 percent, the third quarter will be 4.80 percent and the fourth quarter will be 4.90 percent, according to the report.

This may mean no cut in the repo rate in the next financial year, the report also noted. High inflation kept the Reserve Bank and MPC busy in the year 2023. RBI Governor Shaktikanta Das often urged to keep a steady eye on rising inflation like Arjuna's eye.

In general, an economy with low interest rates increases consumption and this in turn initiates an investment cycle which ultimately leads the economy to higher economic growth. The Reserve Bank is not in a hurry to reduce the interest rate by giving priority to the inflation target. There is a constant demand to reduce the repo rate by the Ministry of Industries and Finance. But it has been seen many times in the past that after the reduction in the interest rate, the industries do not show much enthusiasm in investment. One of the reasons behind this is that the banks are not reducing the lending rate as expected. Even after the exercise of reducing the interest rate, industries do not come forward for investment.

Most of the data on India's economy indicate that the country's economy is in a strong position, but there are also concerns that food inflation could prove detrimental to its health. November's food inflation was as high as 8.70 per cent, pushing headline inflation to 5.50 per cent, close to the RBI's upper range of 6 per cent, which appears to be a major challenge for the country's policymakers, the RBI's MPC, in 2024. Given the prevailing view that any move to cut interest rates in the face of high inflation could prove dangerous to the country's overall economy, it would not be surprising if the year 2024 turns out to be a defining year for interest rates.

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