The Reserve Bank is expected to maintain its current policy rates for the fourth consecutive time during its upcoming bi-monthly monetary policy review meeting early next month. This decision is driven by the persistently high retail inflation and the US Federal Reserve's commitment to a hawkish stance for the foreseeable future, according to experts.
On 8 February 2023, the Reserve Bank raised the benchmark repo rate to 6.5 per cent and has since kept it unchanged due to factors such as stubbornly high retail inflation and global considerations, including elevated crude oil prices in the international market.
The Reserve Bank's six-member Monetary Policy Committee (MPC), led by the Reserve Bank Governor, is scheduled to convene from 4-6 October 2023. The most recent MPC meeting took place in August. Madan Sabnavis, Chief Economist at Bank of Baroda, anticipates the RBI to maintain the status quo due to high inflation and tight liquidity. He also noted uncertainties related to the Kharif crop, particularly pulses, which could further increase prices. Sabnavis expressed comfort with the fact that growth remains on target.
While the Consumer Price Index (CPI)-based retail inflation eased slightly to 6.83 per cent in August from July's 7.44 per cent, it still exceeds the Reserve Bank's comfort level of 6 per cent. The government has mandated the RBI to maintain inflation at 4 per cent with a 2 per cent margin on either side.
Aditi Nayar, Chief Economist at ICRA Limited, expects headline CPI inflation to decline to 5.3-5.5 per cent in September 2023 from August's 6.8 per cent, benefiting from lower tomato prices and a favorable base effect. She anticipates further easing to 5.6 per cent in Q3 FY2024 and 5.1 per cent in Q4 FY2024, but warns of upside risks to food inflation due to uneven monsoons and low reservoir levels affecting crop yields.
Nayar suggests that the MPC will likely maintain the current policy in October 2023, showing caution amid uncertainties in food inflation and elevated crude oil prices. The Reserve Bank has projected CPI inflation at 5.4 per cent for 2023-24, with quarterly estimates of 6.2 per cent in Q2, 5.7 per cent in Q3, and 5.2 per cent in Q4.
Sanjay Bhutani, Director of the Medical Technology Association of India (MTaI), believes that the RBI should consider reducing interest rates to stimulate growth, but acknowledges the challenges posed by high retail inflation and the Federal Reserve's hawkish stance. If a rate cut is not feasible, Bhutani hopes for clear indications of future rate easing to support sectors like medical technology.
Sandeep Bagla, CEO of Trust Mutual Fund, notes that the interest rate environment has become more challenging since the last MPC policy review in August. Both the US and Indian economies have shown strong growth, with inflation rising uncomfortably. While food prices have moderated, the increase in crude oil prices has raised inflation expectations, as seen in the sharp rise in US treasury yields. Bagla expects the MPC to maintain the status quo on repo rates, anticipating a decrease in headline inflation in the coming months.
The Reserve Bank primarily considers CPI-based inflation when making its bi-monthly monetary policy decisions. Since February, when it was raised from 6.25 per cent, the borrowing cost has remained stable with the repo rate held at 6.5 per cent in subsequent policy reviews in April, June, and August. The MPC comprises three external members and three RBI officials, with Shashanka Bhide, Ashima Goyal, and Jayanth R Varma as external members, and Governor Das, Rajiv Ranjan (Executive Director), and Michael Debabrata Patra (Deputy Governor) representing the RBI.