Amid Food Inflation, Policy Rate To Stay At 6.5%: Experts

India’s monetary policy committee (MPC) is expected to maintain key rates when it meets on Thursday, but will adopt a far more hawkish tone as the recent rise in food prices risks becoming entrenched, economists and market participants said.

Food price spikes in India, typical at the onset of the monsoon, drove up headline inflation in June, corroborating the MPC’s view that the fight against inflation is far from over, the Reserve Bank of India (RBI) said in its bulletin last month.

The rise in food prices, however, has been sharper than expected this year and is seen lasting longer.

Partner with Economic Advisory Services at PwC India, Ranen Banerjee believes that the MPC can afford to continue with a pause while the inflationary pressures are upward owing to primary vegetables and some other food items. 

“The demand continues to be weak at the lower value end of the spectrum and hence Indian inflation continues to be a supply-side-driven one. Thus, there is no immediate trigger for a rate increase. The commentary will continue to be hawkish with emphasis on data-dependent actions on the back of impacts seen from the rate increases by BoE, ECB and the US Fed,” Banerjee said.

June CPI rose 4.81 per cent, snapping a four-month easing trend, with economists expecting the July print, due on 12 August to top 6 per cent levels, moving out of the RBI’s 2-6 per cent inflation comfort band.

The MPC at its June policy meeting also reiterated its intent of nudging inflation towards its medium-term target of 4 per cent and not just holding it below 6 per cent.

CIO at Samco Mutual Fund, Umesh Kumar Mehta says that the global economic and inflationary environment is still not up to the mark because of renewed strengthening of crude oil prices and surge in global food prices in extreme weather conditions. “Fed and RBI alike suggest a “When the Facts Change, I Change My Mind” mode. So, it is expected that going ahead only data will decide the course and fate of interest rates,” Mehta added.

Jyoti Prakash Gadia, Managing Director at Resurgent India also believes that the RBI is expected to keep the repo rate unchanged in the forthcoming policy announcement.

“The recent interest rate increase by US Fed and EU will lead to the postponement of the possibility of any reduction in the repo rate in the near future. At the same time, the RBI needs to support the revival and growth prospects of the economy, despite the fluid global scenario and any increase in the repo rate increase is virtually a remote proposition. Overall a balanced view by RBI to maintain a pause at this stage is expected,” Gadia said.

A majority of the experts said that the rates will stay at 6.5 per cent through the first quarter of 2024, followed by 50 basis points worth of cuts by the end of June, around the same time when markets expect the US Fed to start cutting its rates.