The US Fed has cut interest rates in the US by a sharp 50 basis points – and the pundits have gone into a tizzy in trying to suss the spillover effects.

More and more experts in India believe the RBI will cut rates, perhaps as early as October, despite RBI governor Shaktikanta Das’ recent statements that indicated he was ready to dig in his heels and wait for inflation to hover at or below 4 per cent on a sustained basis.

The Reserve Bank of India is actually caught between a rock and a hard place: either it cuts rates now and amplifies risk for banks that are already battling a badly skewed credit-deposit growth ratio, or opts to hold its hand and invites the wrath of industry as well as the government which is determined to attain a 7.2 per cent growth this fiscal.

Capital spending by the government slowed alarmingly in the first quarter and the government wants the private sector to crank up investments, which it will not do until the banks pare lending rates. Banks, in turn, will trim rates only when the RBI cuts the policy repo rate.

D. K. Srivastava, chief policy advisor, EY India, said the RBI is likely to reduce the repo rate but the extent of such a cut may be kept to 25 basis points each in October and December 2024. After that, any further reduction would be data dependent.

Crisil chief economist D.K. Joshi said: “US Fed rate cut makes it easier for central banks in emerging countries, including India, to cut rates. But rate cuts in India, I think, will happen when there is a durable reduction in food inflation. And we do expect durable inflation to take place because higher than normal monsoon rains are playing out this year. So, the stars have aligned for rate cuts to happen in India.”

“Our forecast is that the RBI may cut key policy rates within this calendar year,” he said.

Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, is of the view that a cut in will happen only in February 2025.

``RBI may disassociate from the interest rate developments in the US and may take independent view on the domestic rates based on evolving conditions. Domestic conditions are paramount and with robust growth higher than potential output, case of pause exists,” Ghosh said.

“This is further supported by the fact that impact of weak dollar on international prices and its pass through on Indian economy may evolve in coming days. Additionally, the better liquidity position may provide the cushion to the central bank to let the festive season tide over. As such, we don’t anticipate any rate action by RBI in calendar 2024,’’ he added.

The likelihood of a cut from the RBI has led to questions for the credit-deposit ratio (CD) ratio.

The CD ratio gauges how much of deposits is used for lending. A high ratio is a sign of increased risk. According to the RBI’s August bulletin, it stood at 77 per cent. Any reduction in interest rates may lead to further increase in the CD ratio, though it will also depend on the extent of the cut in deposit rates.