Central bank moves from here on are going to be asynchronous, compared with the coordinated rate cuts in response to the Covid-19 pandemic. To be sure, actions by the Federal Reserve (Fed) influence monetary policy cycles in economies closely connected to the US, but uneven growth and local economic compulsions will spur differing rate actions.

The MPC’s decisions are primarily influenced by its assessment of the strength of the economy, domestic inflationary challenges and, to a lesser extent, the monetary policy actions of systemically important central banks such as the Fed and the European Central Bank (ECB). RBI Governor Shaktikanta Das reiterated this during his policy address on Friday. The most influential central bank — the Fed — is likely to stay put in June because of a high inflation print in April amid strong growth momentum. We now expect the Fed to cut rates only once, in December 2024.

That has crimped the space for monetary policy easing in many emerging markets, which are already witnessing capital flow and currency volatility after a change in the rate cut expectations in the US.

In India, too, foreign institutional investors (FIIs) turned net sellers and the rupee faced pressure from the greenback. Expectations from central banks in emerging markets mostly indicate a delay in rate-cutting cycles or at least slowing the pace. On the other hand, the ECB and many peers have started wielding the knife, given relatively weak growth in their jurisdictions. S&P Global expects the Eurozone to grow at a feeble 0.7 percent in the calendar year 2024.

Consumer inflation in India is solely because of the persistent supply shock in agriculture, which has kept food inflation high. Core inflation (which excludes volatile food and energy prices) stood at a benign and multiyear low of 3.2 percent in April. Fuel prices were 4.2 percent lower in April on-year despite firmer crude oil prices because cooking gas prices were cut. So, why is the MPC not in a hurry to snip, especially since it cannot control food inflation?

One key monetary policy lesson for central banks in the post-pandemic world has been to not ignore supply shocks, particularly when growth is strong. If growth momentum is strong, the MPC would tend to gravitate towards inflation control even in the case of a supply-driven shock. Food prices have been persistently high, with a major contribution from vegetables, which inflated 27.8 percent in April. Inclement weather and pest attacks have only raised the level and volatility of vegetable inflation. The heat wave conditions playing out in many parts of India over the past month and more can continue to exert pressure on food, particularly vegetable prices. The good news is that the south-west monsoon arrived in Kerala two days before schedule. The Indian Meteorological Department has predicted above-normal rains this year. If these are well distributed, food inflation should moderate and bring down overall inflation to 4.5 percent this fiscal.

Second, food has a high (39 percent) weight in the CPI and persistently elevated readings can keep inflationary expectations high and lead to a generalized pick-up in inflation. Third, so far, softer commodity prices have contributed to lower input costs for companies and have helped in keeping core inflation low.

In its April commodity outlook, the World Bank noted that heightened uncertainties in the Middle East have been exerting upward pressure on prices of key commodities, notably oil and gold. If sustained, this and a low-base effect can lift the extraordinarily benign core inflation this fiscal.

According to the S&P-GEP global supply chain volatility index, supply chains are operating near maximum capacity, signaling a better outlook for the manufacturing sector. That, in turn, will keep commodity demand healthy. So, some caution is warranted on this front.

Finally, not only has the fiscal 2024 growth estimate been lifted to 8.2 percent from 7.6 percent by the National Statistical Office, but recent data points also signal a strong start to this fiscal.

GST collections at Rs 2.1 lakh crore in April were the highest ever in a month. The Purchasing Managers’ Index (PMI) stood at 60.8 for services and 58.8 for manufacturing in April — slightly lower than in March — but still in a strong expansion zone. The PMI readings for May show that this momentum continues. On its part, the RBI has kept its inflation forecast this fiscal unchanged at 4.5 percent. Importantly, it has also become more optimistic about GDP growth, revising its forecast by 20 basis points to 7.2 percent.

CRISIL’s call is a moderation to 6.8 percent, which is still high. This is because we expect the constrictive impact of monetary policy to continue. Growth in bank credit and credit card loans has already moderated. Additionally, the fiscal impulse to growth will reduce as the government tilts towards fiscal consolidation.

Summing up, the policy stance at central banks continues to be cautious because of inflation and should stay that way in the near future. We now expect the MPC to start cutting rates in October at the earliest and have lowered our expectation to two rate cuts this fiscal versus the three expected earlier.

The writer is Chief Economist, CRISIL Ltd