RBI Holds Interest Rates Steady At 6.5%

Economists and experts anticipate that the Reserve Bank of India (RBI) will maintain a pause on interest rates and keep the repo rate steady at 6.5 per cent during the upcoming Monetary Policy Committee (MPC) meeting. The three-day meeting is scheduled to take place from 6-8 June, with RBI Governor Shaktikanta Das announcing the outcome on 8 June. The expectation for a rate pause is based on the easing of India's consumer price index (CPI) inflation, which dropped to 4.7 per cent in April 2023, below the RBI's upper tolerance limit of six per cent. 

Shishir Baijal, Chairman and Managing Director of Knight Frank India, stated that the moderation of inflation, supported by statistical factors, provides sufficient grounds for the RBI to maintain the current policy rate. The previous policy statement by the MPC indicated that their next move would be data-dependent, and with the latest inflation numbers falling within the target range, it is likely that the RBI will maintain a pause on rate changes. The positive forecast for a normal monsoon, despite concerns about El Nino, is also expected to support the RBI's decision. 

Furthermore, India's GDP growth for the January-March quarter was recorded at 6.1 per cent, an improvement compared to the previous quarter. Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, noted that the MPC would likely be confident about the inflation and GDP growth trajectory. He suggested that the RBI would adopt a cautious approach, maintaining its inflation and GDP growth forecasts for FY2024. The market will pay close attention to the RBI's commentary on liquidity, especially considering the increase in durable liquidity. 

From a global perspective, the correction in global metal prices and the controlled oil prices contribute to reducing the inflationary trend. Additionally, the expected decision by the US Federal Reserve to hold off on interest rate increases in its upcoming June meeting provides comfort to the RBI. The potential pressure on the Indian currency and interest rates resulting from rate hikes in the US makes the RBI's ability to maintain a stable currency exchange rate noteworthy. Overall, considering these factors collectively, it is anticipated that the MPC will keep rates unchanged and maintain stability. 

Experts cautioned that while India currently enjoys a "Goldilocks situation" with strong GDP data and cooling inflation, vigilance is necessary to mitigate risks from rising crude oil prices, the potential impact of El Nino on drought conditions, and unfavourable geopolitical developments. Arun Singh, Chief Global Economist at Dun and Bradstreet, emphasised the importance of the RBI staying on pause in the policy rate during the upcoming review. 

Rajani Sinha, Chief Economist at CareEdge Ratings, identified potential risks to growth, including the threat of severe El Nino disrupting rural demand recovery and uncertainties in the global economy. Sinha believes that with moderate GDP growth and inflation above target, the RBI is unlikely to cut rates in 2023. 

The MPC, headed by RBI Governor Shaktikanta Das, comprises various members, including economists and representatives from the RBI. Their collective assessment of the economic conditions will guide the RBI's decision-making process during the MPC meeting.