It was back in February 2023 that the Reserve Bank of India's monetary policy committee raised the repo rate to 6.5 per cent. Since then the benchmark rate at which the central bank lends to commercial banks has been left unchanged. Will it change rates this time or will the status quo continue? The MPC will deliberate this in the bi-monthly meeting that begins today.
As the capital markets move on from the Lok Sabha election results, the focus will shift to the monetary policy. The MPC will announce its decision on Friday. In all probability, the repo rate will remain unchanged, in the backdrop of a strong economic growth, while food inflation challenges remain even as headline inflation is easing.
India's economy grew 8.2 per cent in the year ended March 2024. For three consecutive years, India's GDP has grown over 7 per cent. At the same time, the consumer price index (CPI) or retail inflation has been on a downward trajectory. In April, the CPI came in at 4.83 per cent, an 11-month low, driven by softening core inflation. But, food inflation grew at 8.7 per cent.
In the first four months of 2024, the food and beverages inflation has averaged 7.7 per cent, with double-digit inflation in pulses and vegetables.
"Prospects of a good monsoon bodes well for the consumption demand as well as food prices. However, it will be crucial to monitor the temporal and spatial distribution of the monsoon. The RBI will thus be inclined to adopt a cautious approach, preferring to assess the evolving risks associated with food inflation before making any decisions," said Rajani Sinha, chief economist of CareEdge Ratings.
Apart from elevated food inflation, there is also an incremental risk to inflation from industrial metals prices, which are up 20 per cent in the last three months, she noted.
"This warrants closer attention as the rise in input prices can be passed on to the consumption basket," said Sinha.
Mahendra Kumar Jajoo, CIO - Fixed Income, Mirae Asset Investment managers also expects the RBI MPC keeping interest rates on hold but sees the guidance turning slightly dovish compared with earlier meetings. Markets will be closely watching for any commentary on the liquidity front, he said.
"Liquidity has remained in deficit with a fresh build up of cash balances with the government of India. However, government spending is expected to pick up with elections getting over soon. Further, flows associated with the inclusion of Indian government bonds in the JP Morgan index are also scheduled to start pouring in from June. As such the market will watch keenly if there is any fresh measure to address the current squeeze in liquidity," said Jajoo.
Mandar Pitale, head of treasury at SBM Bank of India, also feels the RBI will continue with its firm focus on the 4 per cent inflation goal post. Also, in the backdrop of stalling in the descent of inflation globally, the MPC will hold policy rates for the foreseeable future, with the likelihood of starting the easing cycle only in the October-December quarter of 2024, he added.
"The resilience of GDP growth backed by sustained momentum in domestic demand conditions is providing the space to defer the start of the easing cycle, staying focused on inflation," said Pitale.
Soumya Kanti Ghosh, group chief economic adviser at State Bank of India believes that the CPI inflation will remain close to 5 per cent till May and decline thereafter to 3 per cent in July. For the whole of the financial year 2025, retail inflation is expected to average 4.5 per cent.
How global central banks move on interest rates will also be keenly watched. The European Central Bank is expected to start easing the policy with a 25 basis points cut this week, but the future course remains uncertain. The US Federal Reserve was expected to cut rates multiple times this year. But, in recent times, it has signalled it may not be in any hurry to cut rates to ensure inflation returns to 2 per cent.
Ghosh expects the first rate reduction from RBI also in the October-December quarter and such rate cut cycle is likely to be shallow, he said.
He also believes the stance of the policy committee will remain on withdrawal of accommodation this time.
Aditi Nayar, chief economist and head of research and outreach at credit ratings agency ICRA also opined that the recent inflation data and the outlook for prices of food and commodities have suggested a status quo on rates and stance in the upcoming monetary policy, further cemented by the higher-than-forecast expansion in the Indian economy.
"The likelihood of a stance change in August 2024 followed by a rate cut in October 2024 has eased, unless an abundantly well-distributed monsoon quells food prices in a sustainable fashion," said Nayar.
