The upcoming Monetary Policy Committee (MPC) meeting, headed by the Governor of the Reserve Bank of India(RBI), is set to be held between 4-6 October 2023.
According to experts RBI may opt for a status quo on policy rates for the fourth consecutive occasion, attributed to a consistent surge in retail inflation. Notably, the central bank last adjusted the benchmark repo rate to 6.5 per cent on 8 February 2023.
Preceding the monetary policy review scheduled for October, experts suggested a likelihood of the RBI maintaining the current policy rates, influenced by prevailing high retail inflation.
“The credit policy this time will most likely continue with the existing rate structure as well as policy stance. Hence, the repo rate will be retained at 6.5 per cent with the stance of withdrawal of accommodation," said Madan Sabnavis, Chief Economist, Bank of Baroda.
The Consumer Price Index (CPI) inflation for August stood at 6.83 per cent, demonstrating a decrease of 61 basis points from July's 15-month high of 7.44 per cent. "Inflation is still high at 6.8 per cent and while we do expect it to come down sharply in September and October, there is still some pessimism on Kharif output especially relating to pulses which have the potential to push up prices further. But as the inflation trajectory is downwards a rate hike can be ruled out," Sabnavis added.
The central bank has kept rates unchanged in spite of notable retail inflation and certain global elements, including escalated prices of crude oil in the international market. “The headline inflation is expected to cool down in September as compared to August, but it still remains above the RBI's comfort zone. The recent spike in crude oil prices and global bond yields shall keep MPC vigilant on inflation-growth dynamics," said Parijat Agrawal, head-fixed income, Union Asset Management Company.
This adjustment is attributed to a partial abatement in vegetable prices in comparison to the preceding month, as per data from the National Statistical Office (NSO). "The global environment is turning extremely volatile with increasing headwinds for emerging economies, amid increasing narrative of higher rates for longer as US growth remains resilient and inflation faces upside risks. The US Dollar and bond yields have been on an uptrend. Narrowing interest rate differentials to record low levels poses severe financial instability, thereby warranting a cautious approach by the RBI," observed Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
The Consumer Price Index (CPI) inflation for August stands at 6.83 per cent, demonstrating a decrease of 61 basis points from July's 15-month high of 7.44 per cent. However, it still surpasses the tolerance range set by the Reserve Bank of India. “Further, domestically too food inflation risks along with rising crude oil prices remain a concern. We therefore expect the MPC to maintain a hawkish pause. Further, we expect the RBI to prefer keeping the short-term rates elevated in the near term by using liquidity tools, given the pressure on INR and underlying inflationary risks," emphasised Upasna Bhardwaj.
This marks the fourth instance in 2023 where the retail inflation rate, or the CPI, has exceeded the upper limit of 2-6 per cent stipulated by the RBI. This trend has persisted since July 2022. “However, we may have to wait for a longer time for the MPC to cut the repo rate. In this context, the RBI will revise the Q2 inflation numbers for certain and maybe also that for the year. But we do not expect the headline number to change by more than 0.1 per cent. We do not expect any specific liquidity measures as it is tight today and the RBI is in the process of rolling back the Incremental-Cash Reserve Ratio(ICRR) which was invoked in the last policy. In my view, the RBI may have to look at ways to induce liquidity through Open Market Operations(OMO) or Variable Reserve Ratio (V2R) in case the liquidity situation remains as tight as it is today given that the banks are seeking recourse to the MSF on a daily basis. Here a lot will depend on how the government spends to bring back liquidity in the system,” Sabnavis pointed out.
This trend has persisted since July 2022. The RBI chiefly considers retail inflation when determining the benchmark interest rate, also known as the repo rate. The central bank has forecasted the CPI inflation rate to be 5.4 per cent for the fiscal year 2023-24. “The headline inflation is expected to cool down in September as compared to August, but it still remains above the RBI's comfort zone. The recent spike in crude oil prices and global bond yields shall keep MPC vigilant on inflation-growth dynamics. The MPC is expected to maintain the status quo on rates and stance at the upcoming October meeting,” highlighted Parijat Agrawal.
Despite inflation above the prescribed limit, experts opined that RBI may not change its stance in the next MPC.