Monetary policy: Hobson's choice before RBI

This policy comes at a time when growth is slowing, inflation is still pretty high, and the rupee has started losing value against the dollar

- TAMAL BANDYOPADHYAY

In the first week of November, the US Federal Reserve cut its benchmark interest rate by 25 basis points to 4.5-4.75 per cent, its lowest level since March 2023. In a unanimous vote, the Fed's policy committee went for a second successive cut in the current cycle. One basis point is a hundredth of a percentage point.

Fed's two rate cuts so far this year have reduced the federal funds rate by a combined 75 basis points.

Analysts say that the larger impact will be felt if the Fed continues to cut rates in its December meeting and into 2025. Going by the CEM FedWatch prediction, the chance of Fed cutting rate at its December 18 meeting is 60 per cent. If that happens, at 4.25-4.5 per cent, the rate will be 1 percentage point below its recent high.

The CMD FedWatch is a tool which analyses 30-day Fed fund futures pricing data to calculate the probability of a change in the rate.

In November, as expected, the Bank of England also announced its second rate cut to 4.75 per cent. Its monetary policy committee voted eight to one in favour of reducing the policy rate.

The European Central Bank (ECB) has lowered interest rates three times this year, taking borrowing costs down to 3.25 per cent. It is widely expected to make another 25-basis-point cut in December and further gradual reductions next year. Analysts expect that the ECB's key deposit rate will be lowered to about 2 per cent by mid-2025. The last rate cut took place in October - the first instance of back-to-back cuts in 13 years.

Choosing between food and Fed, the Reserve Bank of India (RBI), in its last policy in October, preferred to fight inflation, driven by food prices, and not toe the line of the Fed. It also pointed out the growing divergence in inflation-growth dynamics across countries.