RBI Expected To Keep Rates Unchanged For Fourth Consecutive Time This Week
The Reserve Bank of India (RBI) is expected to maintain its current interest rates for the fourth consecutive time in its upcoming three-day meeting this week. This decision is primarily based on the recent moderation in inflation and tight liquidity conditions that have led to an increase in money market rates.
Retail inflation, which stood at 7.4 per cent in the previous month, eased to 6.8 per cent in August. This decline can be attributed to government interventions and a fresh harvest, resulting in lower vegetable prices. Economists anticipate further moderation in inflation for the month of September. Despite the rise in crude oil prices, experts believe that it won't significantly impact retail inflation. However, the RBI remains cautious about the firm prices of certain items such as cereals and pulses.
Analysts like Rajani Sinha and Sarbartho Mukherjee from CareEdge have noted that high-frequency retail data indicates a softening in vegetable prices, which is expected to further alleviate headline inflation. Nevertheless, price pressures persist in cereals spices, and pulses.
While the moderation in inflation is one factor contributing to the RBI's decision to keep the repo rate unchanged, the tightening liquidity conditions in the banking system are another key reason. Money market rates, such as overnight call money rates, have increased from 6.30 per cent in August to nearly 6.80 per cent. This liquidity squeeze is a result of outflows due to tax and GST payments, as well as the RBI's intervention in the foreign exchange markets, which absorbs rupee liquidity. In essence, interest rates have risen without an official rate hike.
Madan Sabnavis, the chief economist at Bank of Baroda, believes that the RBI is likely to maintain the existing rates. He points out that inflation, although expected to decrease significantly in September and October, still remains high at 6.8 per cent. There is also some concern regarding kharif output, especially in the case of pulses, which could potentially exert upward pressure on prices. However, given the overall downward trajectory of inflation, a rate hike is unlikely.
