RBI may face tougher path in February rate cut as Fed reshaped global monetary policy expectations: Report

The Reserve Bank of India (RBI) may face a tougher path for cutting interest rates in February, according to a report by Angel One's Ionic Wealth.

The report attributed this to a shift in the U.S. Federal Reserve's stance on rate cuts, which has reshaped global monetary policy expectations.

The report noted that the Federal Reserve's decision to pause rate hikes was not unexpected, as markets had already anticipated a shallower rate cut cycle.

The Fed aligns with market projections of two rate cuts in 2025 and two more in 2026, compared to its September guidance of four cuts in 2025 alone.

The report emphasised that the Fed's hawkish pause, a stronger dollar, and higher U.S. bond yields signal caution for emerging markets.

It said, "In India, the rate cut for February is still expected and while domestic macros warrant it, the global macros will make it a harder decision".

However, it warned that global factors, including pressure on emerging market currencies, could complicate the RBI's decision.

The report also highlighted that the equity markets focus will now be on corporate earnings amid the unfavourable global backdrop. While domestic conditions in India may warrant monetary easing, the broader international scenario demands a more cautious approach.

The report concludes that while the Fed's latest decision aligns more closely with market expectations, it underscores the challenges for emerging markets in navigating their monetary policies.

The path forward for the RBI and other central banks is expected to be shaped by both domestic and global considerations.

It said "We believe that the Fed pause will make it slightly difficult for EMs to walk down the path of easy monetary conditions".

The December meeting of RBI's MPC (Monetary Policy Committee) has decided to keep the repo rate unchanged at 6.5 per cent for the 11th consecutive period and maintain a continuation of its neutral monetary policy stance.