RBI rate cut odds in Oct are low after Iran’s missile attack on Israel

Chances of a potential rate cut by the Reserve Bank of India (RBI) in October could be slim, following the escalating tension in the Middle East. Although India’s GDP growth has been robust in recent years, the ongoing geopolitical unrest in the Middle East could mean that the nation’s central bank may not consider a rate cut before the second half of the fiscal year 2024-’25, or H2FY25.

Speculations of the RBI going in for a rate cut in October 2024 gained ground particularly after the US Federal Reserve announced a 50 basis point (BP) interest rate cut on September 19. On October 1, the United States Federal Reserve Chair Jerome Powell said more interest rate cuts were on the way but the process would take place gradually “over some time”. He hinted that there could be “two more cuts this year” if the US economy performs as expected.

While talk of RBI’s rate cut was on, India’s central bank retained the policy repo rate at 6.5 per cent during its bi-monthly Monetary Policy Committee meeting on August 6 to 8.

However, Iran’s ballistic missile strike on Israel on Tuesday to retaliate against an Israeli attack in Lebanon has affected global markets and oil prices. US stocks closed lower on Tuesday, with Nasdaq losing more than 1 per cent. Oil prices surged, as did shares of energy companies. The oil market was trading at a near two-week low before Iran’s attack and the immediate fallout was a rise in oil prices. Brent futures shot up around 3.5 per cent, or $2.51, to cross $74 per barrel. US West Texas Intermediate crude increased by nearly 3.5 per cent, or $2.41, to scale $70.

The global oil price rise is, to an extent, driven by apprehensions of a possible Israeli retaliation to Iran’s missile strike. An Israeli backlash could put Iranian oil properties in peril, leading to daily massive losses of millions of barrels.

Back in India, the RBI would also want to wait for inflation to drop to at least around 4 per cent on a durable basis before a rate cut decision, which seems unlikely given the global scenario of geopolitical unrest. While core Consumer Price Index (CPI) inflation barring food and fuel inflation has remained less than 4 per cent, the RBI would be aware food inflation comprises around 46 per cent of all prices. CPI inflation increased to 3.7 per cent in August this year from 3.5 per cent the month before.