MUMBAI: Reserve Bank of India Governor Shaktikanta Das on Thursday suggested interest rates are likely to remain high for a long time. After retail price inflation rose 4.75% in May, Das said surveys show inflation is expected to be closer to 5% in June, when it is released on Friday. “I think it's premature to talk about cutting interest rates now when we are at 5% and our target is 4%,” Das said in an interview with CNBC.
He also said that cutting interest rates would have a negative impact on “silent savers” – borrowers are usually the ones calling for lower interest rates.
Das stressed a cautious approach and said while some central banks have provided guidance on the likelihood of rate cuts, the problem, both globally and in India, is that uncertainty prevails. He was reluctant to issue forward guidance that would mislead market participants, saying, “We don't want to issue forward guidance that would put market participants on the wrong train.” The approach is meant to provide stability and reassurance to the market. The adverse impact of rate cuts on depositors is a new issue facing the RBI. The central bank had expressed concern over bank lending outpacing sluggish deposit growth. Business data released by banks in the first quarter showed that deposit growth has not accelerated much.
Besides inflation and the negative impact on deposits, the third factor that may prevent the RBI from cutting interest rates is the high growth rate. Das said the high growth momentum in Q4FY24 continued and was sustained in Q1 as well.
On the stability of the exchange rate, Das attributed the rupee's resilience to macroeconomic fundamentals, which are much stronger than a few years ago. “It has more to do with stable fundamentals than anything else. The Reserve Bank of India just has to manage the volatility,” Das said. He added that it is the strength of fundamentals that justifies an upgrade in the rating by international rating agencies. “Ratings do play a role, but a lot of big investors are doing their own analysis and the market is ahead of the rating agencies,” Das said.
Economists believe that the rise in CPI is largely due to volatile commodities, especially food items. Though the rise in food prices is not driven by demand-related factors, the RBI can only respond by raising interest rates, which will not stop inflation expectations from spreading. Besides food prices, rising communication charges are also likely to add to price pressures this quarter.
The RBI has kept interest rates on hold for 16 months after hiking them in February 2023. Many expect the RBI to cut rates by December this year to maintain the interest rate differential between the US and India. However, if the RBI does not cut rates this year, it will be the longest interest rate suspension since the MPC began setting interest rates in 2016.