US Fed Rate Cut Pause: What Is RBI Up To? Experts Weigh In

The US Federal Reserve announced its decision to pause interest rate cuts for the time being after its meeting on Wednesday, January 29. Notably the Federal Reserve maintained the rate at 4.25 per cent - 4.5 per cent.

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Federal Reserve Chair Jerome Powell stated that there was ‘no rush’ to cut rates again until inflation and jobs data made it appropriate. The decision to pause interest rate cuts comes amid looming uncertainty regarding President Donald Trump’s policies on key areas of importance such as immigration, tariffs and taxes. Earlier in December 2024, the US Fed announced a rate cut of 100 basis points(bps) which included a standard rate reduction of 25 bps.

"I think our policy stance is very well-calibrated. The unemployment rate has been broadly stable for six months ... The last couple of inflation readings ... have suggested more positive readings," " Powell said at a press conference after the meeting.

Following the US Federal Reserve’s decision to pause rate cuts, it remains to be seen what the Reserve Bank of India will do. The RBI’s Monetary Policy Committee (MPC) meeting is scheduled to be held on February 7.

Notably, the RBI’s repo rate has remained 6.5 per cent for nearly two years. Earlier on February 8, 2023 the RBI announced a rate cut of 0.25 per cent increasing the interest rate from 6.25 per cent to 6.5 per cent.

RBI’s decision will take into account several key factors such as a decline in the GDP, amidst a marked slowdown in consumption especially in urban India.

On January 28 the Reserve Bank of India (RBI) announced several measures to inject liquidity into the economy. Key measures include a Rs 60,000-crore bond purchase, a 56-day variable repo rate auction of Rs 50,000 crore, and a $5-billion USD/rupee buy/sell swap auction for a six-month tenure. The measures are aimed at injecting Rs 1.5 lakh crore in a phased manner into the banking system.

Rajeev Radhakrishnan the Chief Investment Officer, Fixed Income, SBI Mutual Fund said that it is expected that RBI’s overall intent is to align the operating rate and the repo rate and address other pressures vis-a-vis infusion of primary liquidity.

“RBI measures to address growth would be based on the evolving domestic growth- inflation outlook. We believe the current priority would be to address the tightening of liquidity and to ensure adequate core liquidity in the system. It is expected that the overall intent would be to align operating rate close to the repo rate as well as address funding pressures in other segments of the market through adequate infusion of primary liquidity,” Radhakrishnan said.

Radhakrishnan added that a policy rate cut is likely to be timed with respect to the outlook on inflation and the effectiveness of the rate cut in reducing pressure on the rupee. Earlier on January 14 the rupee hit a record low as it fell to Rs 86.6475 per US dollar.

“Policy rate cuts would possibly be timed with respect to both the comfort on the inflation outlook as well as the effectiveness of the same considering the pressure on the currency as well as liquidity in the market,” Radhakrishnan said.

Vishal Goenka the co-Founder of IndiaBonds.com said that the US Federal Reserve has opted to not cut rates amid uncertainty over Trump 2.0’s policies among other factors. He added that the RBI is likely to follow suit and not announce any further rate cuts in February.

“The US Fed held interest rates unchanged at their first policy meeting since Trump took over citing the uncertain impact of the new government’s policies, a robust economy and healthy employment rate. Markets implied any rate cuts only in the second half as of now. RBI is likely to follow the wait-and-watch stance on interest rates at its next meeting in February and we do not anticipate any imminent rate cuts in India as well,” Goenka told Outlook Money.

Deepak Ramaraju, Senior Fund Manager at Shriram Asset Management Company said that the FOMC’s decision to pause rate cuts is likely to pressure the RBI to wait for stability. However, he added that the upcoming Union Budget and the RBI MPC meet may offer a ‘positive signal’.

“For the Indian economy, a pause may pressure the Government of India and the RBI to wait for stability in the global environment while pushing for a more favourable rapport with the US before adopting liberal, growth-oriented policies. However, the upcoming Union Budget on February 1, 2025, and the RBI’s next REPO rate announcement may offer a much-needed positive signal,” Ramaraju said.