U.S. Federal Reserve keeps interest rates unchanged; will RBI follow suit?

In line with Wall Street expectations, the U.S. Federal Reserve kept interest rates unchanged on Wednesday in its first major monetary policy decision since Donald Trump took charge as the 47th U.S. President. The U.S. central bank maintained interest rates in the range of 4.25-4.5%, saying that inflation remains elevated over the threshold limit of 2%, while the economic outlook is uncertain. Reacting to the Fed decision, all three major U.S. stock markets ended lower in overnight trade, with Nvidia and other tech stocks leading the fall.

The U.S. central bank’s status quo decision has drawn sharp criticism from President Donald Trump, who accused the Fed and its chairman Jerome Powell of mishandling the battle against inflation, saying they had "failed to stop the problem they created with Inflation".

"The Fed has done a terrible job on Bank Regulation. Treasury is going to lead the effort to cut unnecessary Regulation, and will unleash lending for all American people and businesses. If the Fed had spent less time on DEI, gender ideology, “green” energy, and fake climate change, Inflation would never have been a problem. Instead, we suffered from the worst Inflation in the History of our Country!,” Trump said in a social media post.

In the December meeting, the Fed had cut the benchmark interest rate by 25 basis points (bps), while it reduced the borrowing rate by a total of one full percentage point in the past three months in the run-up to the U.S. Presidential elections.

Will RBI follow suit?

The Reserve Bank of India (RBI) is set to take a call on interest rates at a policy meeting on February 7, a week after the Union Budget. In the current environment of rising inflation and falling growth, it would be interesting to see if the Monetary Policy Committee (MPC) will decide the repo rate trajectory in tandem with the U.S. Fed.

While the market is anticipating a 25 basis point cut in repo rate, the policy decision will depend on the fluidity of global dynamics amid rising pressure on the rupee along with inflation.

“While the rate cut call in Feb '25 is still a close one, we admit some policy flexibility may be exercised by the RBI. The recent dollar weakness has given some breathing space to EMFX (and INR), which could also provide some wiggle room to the RBI on its monetary reaction function. And for any cuts to be effective on transmission, a better banking system liquidity is pertinent,” Emkay says in a note.

Historical data suggests that the RBI and the Fed have barely moved in tandem, with India’s central bank following its U.S. counterpart only 16 times in the last two decades.

In the December policy meeting, the RBI kept the repo rate steady at 6.5%, marking the eleventh consecutive meeting without a change. However, the central bank opted to reduce the Cash Reserve Ratio (CRR) by 50 basis points to 4%, a move aimed at infusing liquidity into the banking system.

Earlier this week, the central bank announced a slew of measures to spur waning credit offtake and inject liquidity into the banking system, including bond purchases and dollar/rupee swaps. The central bank has proposed to buy government securities worth ₹60,000 crore in three different tranches, while it plans to conduct a USD/INR buy/sell swap auction of $5 billion for a tenor of six months on January 31. These measures are expected to collectively infuse ₹1.5 lakh crore into the banking system to ease the rising liquidity crunch. Banking system liquidity has been persistently in a deficit zone since mid-Dec '24, after being comfortably in surplus during Jul-Nov '24.    

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