Goldman Sachs Expects Central Bank To Keep Policy Rates Unchanged

In a recent report, analysts at Goldman Sachs India have projected a significant decrease in inflation, prompting a Wall Street brokerage firm to anticipate that the central bank (RBI) will maintain the policy rates at 6.5 per cent during the upcoming review on June 8.

According to the report released on Friday, Goldman Sachs India predicts that headline inflation will average 5.3 percent this year, aligning with the Reserve Bank of India's (RBI) target range of 2 per cent plus or minus 4 per cent. However, the analysts expressed concerns regarding potential risks to food inflation due to crop damages caused by unseasonal rains.

The retail inflation rate in India dropped to an 18-month low of 4.7 per cent in April, down from 5.7 per cent in March. Additionally, core inflation, which excludes volatile food and fuel prices, also decreased to 5.2 per cent in April.

Looking ahead, Goldman Sachs India expects the average headline inflation for 2023 to be 5.3 per cent, well within the RBI's target range of 2-6 per cent. This suggests that in the second quarter of 2023 (first quarter of the fiscal year 2024), headline inflation is likely to be approximately 50 basis points lower than the RBI's most recent forecast.

Given these projections, the brokerage firm believes that the RBI will maintain the policy repo rate at 6.5 per cent during the policy meeting on June 8. Furthermore, they anticipate that the central bank will continue to keep the rates unchanged until the end of the year.

It is noteworthy that since May 2022, the RBI has raised the repo rates continuously for six consecutive times, reaching 6.5 percent from 4.15 per cent. However, during the April review, the central bank surprised the market by pausing the rate hikes while emphasising its commitment to liquidity absorption measures.