Controlled inflation gives elbow room

Finmin has an optimistic projection on the inflation trajectory that, if shared by RBI, could signal a resumption of interest-rate cuts earlier than anticipated. True, core inflation - filtering out volatile food and fuel prices and the metric that rate-setters watch most keenly - seems to have been tamed as the commodity cycle has turned. This is expected to endure as the global economy continues to cool down, barring geopolitical developments that could cause energy and shipping costs to rise. Episodic food inflation has been drawing swift supply responses from GoI, although their effects are debatable. Export bans on rice and wheat have had insufficient effect on inflation in cereal prices.

India has fewer reasons to synchronise its rate-cutting cycle with the rest of the world than it had during the coordinated 'up-move'. It had a relatively shallow climb in interest rates post-Covid and will have an equally shallow dive to negotiate. Economic growth has been remarkably resilient, and India will want to use this to its advantage to draw in a bigger share of global capital. This imposes a constraint on its interest-rate movements vis-a-vis advanced economies, where the markets expect rates to begin trending down later this year. But interest rates in the US will have to decline considerably to reach their historical differential with those in India. There is a possibility interest rates in advanced economies will settle somewhat higher after the rate-cutting cycle than they were at before the pandemic.

Against this backdrop, Indian policymakers will try to feed a revival in private investment demand with cheap credit. There are indications that investment is supplanting consumption, which put the economy on the path to recovery. RBI's timing for interest-rate cuts will probably be guided by the transition in domestic demand more than by developments in the external environment. A gov embarked on a multi-year capex programme would like to see lower interest rates sooner to crowd in private investment.