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Speaking to CNBC-TV18, Chinoy highlighted the importance of forward-looking monetary policy, given India’s inflation trajectory and evolving economic dynamics. According to Chinoy, while December’s consumer price index (CPI) is expected to remain sticky at 5.5%, food prices are anticipated to ease in January and February, bringing inflation closer to the RBI’s 4% target.
“By the February meeting, the RBI will have a much better sense of how food inflation is evolving and the extent of imported inflation from rupee depreciation,” he said.
Chinoy noted that the RBI’s estimates indicate a 5%-rupee depreciation adds approximately 35 basis points to headline CPI over multiple quarters. However, if inflation trends downward and reaches the 4% range, it could provide room for a rate cut to support India’s slowing economic growth.
On the global front, Chinoy pointed out the challenges posed by tight financial conditions and a strong US dollar. However, he underscored India’s relative resilience due to its robust external buffers and strategic policy independence.
“India has built significant monetary policy autonomy,” Chinoy explained. “The India-US policy rate differential, which used to be 500 basis points in 2018, has narrowed significantly. Despite a strong dollar, India’s exchange rate policies and inflation management have allowed room for manoeuvre.”
While the Federal Reserve has tempered expectations for rate cuts in 2025, Chinoy argued that the RBI’s actions would hinge more on domestic inflation dynamics than global monetary trends. “The hope is that a strong kharif harvest and an equally robust rabi season will alleviate food inflation, allowing monetary policy to respond to domestic growth concerns,” he added.
Chinoy also cautioned against potential global headwinds in 2025, driven by US policy uncertainties, including tariffs and immigration restrictions, which could stoke inflation further. “The US economy has shown remarkable resilience, with growth persisting at 3% in the fourth quarter of 2024. This complicates the Fed’s ability to achieve its 2% inflation target,” Chinoy observed.
For India, a stronger dollar and rising US bond yields could exert additional pressure on the rupee, but Chinoy maintained that India’s external position provides a cushion against these shocks. He advocated a dual strategy, using foreign exchange interventions to manage currency stability while employing interest rates to address domestic economic needs.
While a February rate cut remains a “live” possibility, its realisation depends on favourable inflation dynamics and the absence of external shocks. “If inflation moderates to the 4% range and growth concerns persist, the RBI may step in to support the economy. However, a lot hinges on how global and domestic factors play out in the coming months,” he said.
Below are the excerpts of the interview.
Q: Draw up the global backdrop for us. I know it’s tough, but the Fed has just told us that the number of rate cuts are not likely to be four, but two. So, will global be a headwind or a tailwind for India?
Chinoy: We should be prepared for quite a treacherous global environment in 2025, because there are two distinct and potentially reinforcing shocks in play. It’s important to disentangle both of them. The first one, which occurred with the Fed this week, really should not be a surprise. The premise that the Fed would cut meaningfully in 2025 was based on the fact that the US economy would slow and inflation would head towards its 2% target. But what we’ve been seeing all year long is this remarkable US resilience. Despite monetary policy being tighter by historical standards, the US economy, even in the fourth quarter, is still growing at 3%. So, forget the recession, we had 3% growth in the fourth quarter, and this has been a story all year long, propelled by a very resilient US consumer.
Now, what that meant is that the last mile of disinflation is getting much more difficult for the Fed. The fact is, if you look at the last three or four months and you look at the momentum of core inflation in the US, it’s running at an annualised rate of 3.5%. So, we’re very far away from 2%. So, it was no surprise that having engineered the first 100 basis points of rate cuts. I think the first 100 basis points were non-controversial, given how elevated starting points were. For US policy to go from 5.5% to 4.5%, was not controversial. Now, beyond that, the Fed will have to move much more cautiously for two reasons. One is, as the Fed chairman said, there’s so much uncertainty, that when you’re driving on a foggy evening, you want to go slowly. But secondly, given what’s happened in the US economy, there’s uncertainty now about the neutral rate. There used to be a belief that the US neutral rate was at 2.5%. The Fed has slowly been marking that up towards 3%. I won’t be surprised if that neutral rate is much higher than that. So, for both these reasons, the Fed has the space to ease much less in 2025.
Now, related to this is the Trump tariffs, because if you do get Trump tariffs, the risk is that you will reinforce some of these dynamics. Two big parts of the economic agenda for the new President is A) tariffs, and B) slowing the pace of immigration or resulting in deportation. And the dirty little secret is that high levels of immigration have allowed the US to grow at these levels and kept some lead on inflation. If you were to simultaneously slow the pace of immigration and put on tariffs. That is an adverse supply shock, which will push up inflationary pressures even more and will hurt growth. Of course, the US is hoping equity markets are excited for the most part because they believe at least in the US, these two adverse supply shocks will be offset by deregulation and easier fiscal policy.
The bottom line is there is uncertainty which could push up inflation further next year. We saw that in some of the forecasts of the FOMC members and therefore the Fed has to move closely. What all of this means is that the US exceptionalism that we’ve seen in 2024, higher growth, stickier inflation, and therefore higher rates, could get reinforced in 2025 by some of President Trump’s policies. And that’s why the dollar today is at a two-year high, and that’s why bond yields have backed up again.
Q: Let me straightaway come to India. We had almost started pencilling in a rate cut from the Reserve Bank in February. But now, with the dollar getting so strong, the likelihood of, say, the rupee at 85.50 or 85.30, imported inflation, and the fact that the Fed may not cut very soon in the first half of 2025, does the hope of a rate cut from the Reserve Bank fade?
Chinoy: Having tight global financial conditions affects all emerging markets, some more than less. I would argue India is impacted relatively less because we still have very high external buffers. And I keep going back to the point that the India-US policy rate differential back in 2018 used to be 500 basis points. Indian policy rates were 5 percentage points above the US, that narrowed at its bottom all the way to 1 percentage point. And that’s another way of saying India did not have to hike in lockstep with the Fed. We had bought ourselves some independent monetary policy because of the quantum of reserves. So just because the Fed is cutting less doesn’t preclude the RBI from cutting. What will matter more from India’s perspective is what’s happening with inflation. We’re still expecting December CPI to be sticky at 5.5%. So, two things will matter going forward in the first quarter. Are we going to see food inflation roll off? That’s the hope given that we’ve had a strong kharif harvest and rabi should be strong as well. Hopefully food inflation rolls off. And the second is it’s important if the dollar is stronger and all exchange rates are depreciating that India’s exchange rate does not become uncompetitive. So, if the exchange rate has to become the shock absorber which it must in some circumstances, there will be some imported inflation. The good news is we’re starting off core inflation at a low level at about 3.5%-3.6% has been the average over the last year. So hopefully we can absorb some currency depreciation and imported inflation and still have inflation in the 4% handle in the coming months. So, there are a lot of ifs in that statement. But if you are in a situation where inflation is in the 4% handle, I think monetary policy will have some space to move in 2025, given the quantum of external buffers India still has.
So you use the FX intervention on the dollar front and you use interest rates to handle domestic conditions and therefore you’ve got two instruments for two objectives.
Q: What is the space available to RBI as you see inflation – the Nowcast numbers are still looking strong as you said 5.5% for December. So, is the February rate cut even live?
Chinoy: February rate cut is live because the central bank will have to be forward-looking, and the expectation is that January, February, March, given how food prices are expected to evolve in later in December and January, should be below 5%. So, by the February meeting, the RBI will have a much better sense of how food inflation is evolving and what the quantum of this imported inflation is. The RBI’s own estimates are about 5% of rupee depreciation adds about 35 basis points to headline CPI over multiple quarters. So, I think in February, the central bank, if it believes that inflation is going to be in the 4% handle, I think February is still live, barring more shocks, because I do think we have to also be mindful that, we have seen a cyclical slowing in growth and it’s uncertain the extent to which the economy recovers. So, with fiscal policy tightening, monetary policy, given where real rates are, may have to step in and offer some support next year.
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