At its bimonthly monetary policy review meeting early next month, the Reserve Bank is likely to maintain status quo on policy rates for the fourth consecutive time as retail inflation continues to be high and the US Federal Reserve has decided to maintain a hawkish stance for some more time, according to experts.
Amid persistently high retail inflation and other global variables, such as rising crude oil costs on the international market, the Reserve Bank increased the benchmark repo rate to 6.5 percent on February 8, 2023, and has since kept it there.
The Reserve Bank Governor will preside over a meeting of the six-member Monetary Policy Committee (MPC) over the weekend of October 4-6, 2023. The MPC, the highest rating-setting group, had its most recent meeting in August.
“Given that inflation is still high and liquidity is scarce, we do anticipate the RBI to maintain its current stance this time. In fact, according to the RBI’s prediction, inflation will be over 5% in Q3 as well, ensuring that the status quo holds true for the whole year and likely into Q4, according to Bank of Baroda Chief Economist Madan Sabnavis.
Sabnavis said that there are crop-related risks, particularly for pulses, which might drive up prices.
“The comfort is that there is less concern on growth, which is on target,” he said.
Retail inflation measured by the Consumer Price Index (CPI) fell from 7.44 percent in July to 6.83 percent in August, although it still above the Reserve Bank’s comfort zone of 6 percent.
It should be noted that the government has ordered the RBI to maintain an inflation rate of 4% with a 2% buffer on each side.
According to Aditi Nayar, Chief Economist at ICRA Limited, the average price of tomatoes would have decreased by a factor of two, bringing the headline CPI inflation rate down to 5.3–5.5% in September 2023 from 6.8% in August 2023.
While there are upside risks to food inflation due to the effect of unequal and subpar monsoons and low reservoir levels on Kharif yields and Rabi sowing, respectively, she added, “we expect the CPI inflation to ease to 5.6% in Q3 FY2024 and further to 5.1% in Q4 FY2024.”
In October 2023, according to Nayar of ICRA, the MPC is anticipated to continue on hold while exemplifying prudence given the uncertain outlook for food inflation and the high price of crude oil.
The Reserve Bank forecasts CPI inflation of 5.4% for 2023–2024, with Q2 at 6.2%, Q3 at 5.7%, and Q4 at 5.2%, with risks being fairly distributed. The expected CPI inflation rate for Q1 2024–25 is 5.2%.
Sanjay Bhutani, Director, Medical Technology Association of India (MTaI), was asked about his predictions for the next bimonthly monetary policy. He said that the RBI has traditionally followed market sentiment by keeping the benchmark interest rate at 6.5 percent.
But in order to spur growth, he added, it’s time for the central bank to think about lowering the interest rate.
The medical technology sector, which is struggling under the weight of high debt, does expect the RBI to continue with the pause and at the same time provide some firm indication of easing rates in the near future, Bhutani said. However, if that is not possible due to high retail inflation and the Federal Reserve’s hawkish stance, he added.
According to Sandeep Bagla, CEO of Trust Mutual Fund, since the MPC’s most recent policy review in August, the environment for interest rates has significantly deteriorated. The economy has demonstrated steadfast development in both the US and India, and inflation rates have increased over acceptable levels.
As indicated by the significant increase in US Treasury rates, “although food prices have fallen, crude oil prices have risen higher, boosting inflationary expectations. Since headline inflation is anticipated to decline in the next months, the MPC will take all of these considerations into account and keep repo rates unchanged, the official added.
When determining its bimonthly monetary policy, the Reserve Bank primarily takes the CPI-based inflation into account.
The RBI has maintained the repo rate at 6.5 percent since it was hiked from 6.25 percent in February, stabilizing the borrowing cost that began to rise in May of last year. The benchmark rate was later maintained in the next three bimonthly policy reviews in April, June, and August.
Three external members and three RBI employees make up the MPC. Shashanka Bhide, Ashima Goyal, and Jayanth R Varma are the panel’s external representatives. Deputy Governor Michael Debabrata Patra and Executive Director Rajiv Ranjan are the two RBI representatives in the MPC in addition to Governor Das.