The Reserve Bank of India (RBI) is expected to uphold the status quo on both policy rate and stance for the tenth consecutive time in its October policy meet, says a research report by the Bank of Baroda (BoB).
"The newly constituted MPC is likely to await more clarity on the evolution of the inflation trajectory before embarking on monetary easing path. While the near-term outlook on inflation is positive, the MPC's decision is likely to be guided by the long-term outlook of inflation and growth, as has been explicitly stated by the Governor," says BoB report.
Despite inflation falling below the apex bank's target of 4 per cent for the past two months, the policy rates will not change in the MPC meeting commencing on 7 October, as per BoB report.
This is partly because the recent drop in inflation was due to a "positive base effect", the analysis added. The MPC committee will announce its decisions on the policy rate on 9 October.
It said that the volatility in food prices is likely to elicit a cautious approach from the RBI, a rate cut at this juncture is unlikely. An opportunity of a rate cut can only be seen in December policy, when the apex bank will become sure that inflation has moderated on a durable basis, it added.
However, the report further added that the outlook on food inflation is positive, supported by a normal monsoon a favourable outlook on food inflation is seen, food prices are expected to remain stable. Additionally, the arrival of fresh crops should help ease the higher prices of vegetables that have been a concern, said the analysis.
The core inflation is also stable and as anticipated by the report, it will stay around or below 4 per cent, suggesting that the broader inflationary pressure in the economy is under control. The unseasonal rainfall during the monsoon withdrawal could damage crops and push the food prices higher again, the report added.
"As such, India's macro fundamentals remain robust, and the economy is likely to register growth of 7.3-7.4 per cent in FY25. Given this backdrop, the MPC is likely to wait for another few months to assess the risks to the inflation trajectory, before cutting rates," the report added.
On the domestic growth front, the recent high-frequency indicators paint a mixed picture of the economy in Q2 FY25. Manufacturing PMI slipped to 56.5 in Sep'24 from 57.5 in Aug'24. Vehicle sales have moderated, with PV sales declining by 4.5 per cent in August 2024.
Tractor sales have also moderated sharply. Core sector output also contracted for the first time since February 2021. On the other hand, GST e-way bills have seen steady growth. Services sector activity is also witnessing a continued expansion, as signalled by the services PMI.
The weakness in domestic activity can be attributed to seasonal factors, as activity is sluggish during the monsoon period. Despite this, India remains on track to register a strong growth of 7.3-7.4 per cent in FY25. In the last MPC meeting, the RBI decided to keep the policy rates unchanged at 6.5 per cent.
The decision to keep the repo rate steady came amidst persistent concerns about inflation, which remains above the RBI's target range. (ANI)
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