It might be an exaggeration to say that the US Federal Reserve has taken a leaf out of our Reserve Bank of India’s playbook for monetary policy.

Or, maybe, there is no exaggeration!

The RBI has emerged as a trailblazer for other central banks as problems plaguing the world economies post-COVID have been similar: runaway inflation in the backdrop of weak economic growth.

The “Central Banker of the Year” award received by Governor Shaktitanta Das earlier this week is, perhaps, a testimony.

The RBI has been highly proactive during COVID and is now resolute to break the back of inflation.

Ditto for the Fed, too, even as it is tackling a even dire inflation problem. From a 4-decade high of over 9%, inflation is sought to be brought down to 2%.

In contrast, the RBI is aiming to bring down inflation to 4% from over 7%. (The latest CPI inflation was at 4.25% for May).

Fed, after raising interest rates by 500 basis points in what has been termed an aggressive campaign against inflation, the Fed finally took a breather on Wednesday.

The RBI did the same in April and held rates again earlier this month with its hawkish pause.

Both the central banks sought to quell the expectation of a pivot to rate cuts in the remainder of the year, which the markets are now grudgingly reconciling to.

Continuing with the similarities between the central banks (or acknowledging that his Indian counterpart is leading the way), Fed Chairman Jerome Powell told the media that the decision to pause and hold the Fed rate at 5.00-5.25% was a “decision made today was only about this meeting”.

Governor Das had said the same thing when the RBI paused first in April. And Das and the rest of the Committee continued that pause in June.

So, what happens next?

Inflation in both countries is easing even if it is still far from the target.

And the two central banks will need a considerable amount of time to assess the impact of the past rate hikes, and the disinflation process will continue due to the effects of the past hikes.

Especially having cited assessment of past measures as a reason for holding rates, the central banks will find it tough to resume rate hikes unless there are big surprises on inflation.

In the case of India, the surprises could come from the impact of El Nino on food production and prices, and in the case of the US, the price pressures on non-housing services are still holding, and the labour market is still tight as per Powell’s assessment.

The pause, by both the central banks, ironically also means the central banks are likely to wait to cut interest rates. No excessive hikes, so no early cuts in rates could be the most probable outcome.

RBI Governor Shaktikanta Das has said the MPC is chasing the ideal of 4% inflation and that is why the stance of continuing with “withdrawal of accommodation”, which is a euphemism for tightness, is being retained.

In other words, the bar for RBI to cut rates is inflation reaching and sustaining at 4%. And the RBI does not expect inflation to hit 4% this year.

The Dot Plot of Fed policymakers’ personal expectations shows that they don’t foresee Fed cutting rates in 2023.

In 2024, the median of expectations shows the Fed rate could be cut to 4.50-4.75%, which is 25 basis points higher than what was projected in March.

The House-Fed is divided on the extent of rate cuts in 2024. Some members say the Fed could cut rates up to 3.50-3.75%, and some expect the rate to stay elevated at 5.75-6.00%.

In all probability, both the central banks will not hike interest rates again in this cycle. However, the Fed officials were emphatic that they might have to by two rounds of 25 basis points apiece to bring inflation down to 2%.

It will be fair to at least say that the bar is pretty high for either of the central banks to raise rates.