The Reserve Bank of India (RBI) is likely to maintain status-quo on the key interest rates for the third time in a row in its upcoming bi-monthly policy review meeting – Monetary Policy Committee (MPC) – despite the US Federal Reserve and the European Central Bank hiking benchmark rates, experts told the news agency PTI. The central bank may not hike the rate as domestic inflation is within the RBI’s comfort zone, they said.
The RBI has retained the rate at 6.5 per cent since February when it was raised by 25 basis points from 6.25 per cent. In the previous two policy reviews in April and June, the benchmark rate was retained.
The six-member Monetary Policy Committee (MPC) meeting is scheduled on August 8-10. The policy decision would be announced on August 10 by RBI Governor Shaktikanta Das.
Bank of Baroda’s Chief Economist Madan Sabnavis said he expects the RBI to hold on to a status quo position on both rates and stance. “The reason is that while inflation is presently running at less than 5 per cent there would be some upside risk to this number in the coming months with prices of vegetables and pulses going up sharply. Therefore, an extended pause is expected.”
With the RBI having a forecast of inflation of 5.4 per cent for the third quarter, it looks unlikely that the repo rate or stance may be changed till the beginning of the next calendar year, Sabnavis added.
Kotak Mahindra Bank’s chief economist Upasna Bhardwaj said: “On the policy stance since the liquidity conditions have turned favourable post the announcement of the withdrawal of the Rs 2,000 note, we expect the RBI to continue to hold on to the current stance of ‘withdrawal of accommodation’.”
Bhardwaj said all eyes will be on how domestic inflation plays out and the global cues that are suggesting a greater probability of a peak out of the US Fed’s monetary tightening cycle, thus easing.
Last week, the US Federal Reserve, the central bank of America, increased interest rate by 25 basis points to 5.25-5.5 per cent, taking it to a multi-year high.
The European Central Bank (ECB) on Thursday announced a new rate increase of a quarter percentage point, bringing its main rate to 3.75 per cent. The ECB too has increased its main rate by a quarter percentage point.
Last month, India’s retail inflation jumped to a three-month high of 4.81 per cent, mainly on account of hardening prices of food. The inflation, however, remains within the RBI’s comfort level of below 6 per cent.
Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA said that the surge in vegetable prices is likely to push the retail inflation above 6 per cent in July 2023. The average for this quarter would exceed the latest estimate for the second quarter that the MPC released in June 2023. “As a result, we expect the MPC’s commentary to be fairly hawkish, amid a continued pause on the repo rate and stance in the upcoming policy review,” she said.
V Swaminathan, Executive Chairman of Andromeda Sales, said the RBI will maintain the status quo and opt for a hawkish stance in view of the recent rate hikes announced by the Fed and European Central Bank. He also said that the retail inflation may not ease to the anticipated levels on account of widespread rains and disruption in the supply chain due to flooding in different parts of the country. “Taking into account these factors the best possible course for the central bank would be to go in for the status quo for the third time in a row.”
Lakshmi Iyer, CEO-Investment and Strategy, Kotak Investment Advisors said that the tone and texture taken by the MPC will be more relevant for markets. “But looking at global macro, India’s wait for a rate cut may just get longer and an extended period of status quo remains,” Iyer said.
(With inputs from PTI)