What to expect from RBI’s upcoming policy review? No change is likely, with inflation seen to remain above 5%, experts say
The Reserve Bank is unlikely to cut interest rates at its next two-month monetary policy review later in the week as retail inflation remains a cause for concern, and the Middle East crisis is likely to continue to deteriorate, weighing on crude oil. and commodity prices, say experts.
Earlier this month, the government re-established the Central Bank’s rate-setting team — the Monetary Policy Committee (MPC). The reconstituted team, with three newly appointed foreign members, will begin its first meeting on Monday. MPC Chairman RBI Governor Shaktikanta Das will reveal the outcome of the three-day discussion on Wednesday (October 9).
The Reserve Bank of India (RBI) has kept the repo or short-term lending rate unchanged at 6.5 percent from February 2023, and experts think that some reduction is possible only in December.
The government has tasked the central bank to ensure that consumer-based retail inflation (CPI) remains at 4 percent with an average of 2 percent on either side.
In the current situation, experts feel that the RBI may not follow the US Federal Reserve, which has lowered the benchmark rates by 50 basis points, and the central banks of other developed countries, which have reduced interest rates.
“We don’t expect any change in the repo rate or MPC stance. The reason is that inflation in September and October will be above 5 percent, and the current inflation is due to the base effect. Besides, core inflation is rising. up,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
In addition, the recent Iran-Israel imbroglio could escalate, and there is uncertainty here, he said.
“Therefore, status quo is the most likely option even for new members. The inflation forecast may come down by 10-20 bps and no change in the GDP forecast is likely,” said Sabnavis.
The central bank last raised the repo rate to 6.5 percent in February 2023 and since then, it has held the same rate.
Icra’s Chief Economist, Aditi Nayar, said that given the below-par first-quarter GDP growth compared to the MPC’s forecast and the possible sharp cut in the second quarter of CPI inflation, “we believe a shift to neutral may be appropriate.” October 2024 policy review”.
This could be followed by a shallow round of rate cuts of 25 bps each in December 2024 and February 2025, he added.
“An abundant monsoon provides some insurance against rising crop prices. The impact of global political developments and geopolitical uncertainty on inflation volatility remains a risk,” added Nayar.
The HSBC report said three developments stand out — growth rates have slowed recently, inflation is slowing, and the external environment has shifted from inflationary to deflationary.
“We believe the RBI has nothing to gain by waiting too long. We think it will change its stance from hawkish ‘withdrawal’ to ‘neutral’ at the October 9 policy meeting, followed by a repo cut of 25 bps each. in the December and February meetings , the repo rate reached 6 percent,” said the report.
The RBI kept the repo rate unchanged at 6.5 percent in its bi-annual review in August amid risks of higher food inflation.
This was the ninth consecutive MPC meeting, which decided to maintain the status quo in relation to the measure.
Pradeep Aggarwal, founder and chairman, Signature Global (India) Limited, said that while the real estate industry, the developer community, and home buyers are hoping for a cut in interest rates in the upcoming monetary policy review, the RBI is likely to hold on to gains. rate cut for the tenth time in a row.
“The apex bank still seems uneasy about the retail inflation situation, especially the increase in food prices. Therefore, it is expected to maintain the situation. The recent interest rate cut by the US Federal Reserve has raised similar hopes in India, but the domestic situation is very different,” add.
SBM Bank India’s Head of Treasury Mandar Pitale believes that the MPC has been advocating a restrictive policy until inflation is consistently aligned to the 4 percent target.
“With the negative effect of taking a few CPI prints close to 5% when combined or removed, it will pose a serious challenge to the MPC to start slowly at the October meeting,” Pitale said, adding that the MPC is expected to be deliberate. on global factors such as the behavior of inflation in developed economies.
The government has appointed Ram Singh, Saugata Bhattacharya, and Nagesh Kumar as external members of the MPC. They replaced Ashima Goyal, Shashanka Bhide, and Jayanth R Varma.
Apart from the Governor, the other members are RBI Deputy Governor in charge of monetary policy Michael Debabrata Patra and Executive Director of RBI’s monetary policy department Rajiv Ranjan.
At the May 2022 meeting, the MPC raised the policy rate by 40 basis points and was followed by rate hikes of varying magnitudes, at subsequent meetings until February 2023. The repo rate increased by 250 basis points combined between May 2022 and February 2023.
