The Reserve Bank of India's monetary policy committee meets this week, and a key question on everyone's mind would be whether it will cut the repo rate now. The central bank has kept the benchmark rate at which it lends money to commercial banks on hold at 6.50 per cent for eight consecutive times. And this time could be no different.
India has clocked strong economic growth over the past year and the RBI has also raised its GDP growth forecast for the 2024-25 financial year upwards to 7.2 per cent from 7 per cent in the previous MPC meet.
But, despite the steady growth in Asia’s third-largest economy, all is not well on the inflation front-not "by a long shot" noted Manoranjan Sharma, Chief Economist, Infomerics Ratings.
The CPI (consumer price index) inflation in June rose to a four-month high of 5.08 per cent. Food inflation shot up to a six-month high of 9.36 per cent.
After a slow progress in June in some parts, monsoon rain has picked up across the country over July and into August, aiding a pickup in agriculture activity and overall rural sentiments, but how food prices pan out in coming months, will have to be closely watched.
"Even though a high base last year is going to pull headline inflation down towards 4 per cent in Q3 (July-September), there are upside risks to food inflation driven by uncertainty in production due to an uneven monsoon, even as sowing of key summer crops are tracking better than last year," said Santanu Sengupta, chief India economist at Goldman Sachs.
He also feels, MPC will leave the repo rate unchanged at 6.50 per cent, sound relatively optimistic on growth, acknowledge decline in core inflation, but continue to reiterate the commitment to the 4 per cent headline inflation target.
There are other reasons, RBI will be watching out, too, like the escalating tensions in the Middle East, which could have a huge impact on commodity prices.
"Given heightened geopolitical dynamics, geoeconomic fragmentation, and the RBI’s unequivocal mandate of monetary stability, which is characterized by moderate and stable inflation, there is a compelling need for caution and vigil on the inflation score," said Sharma of Infomerics.
RBI will also be watchful of actions of other central banks in the coming months. Many analysts expect the US Federal Reserve to cut interest rates in September, more so in the backdrop of a weak payrolls data last week, which has sparked fears of a looming recession and in turn raising a probability of a steeper rate cut by the Fed. The US unemployment rate rose to a near three-year high of 4.3 per cent in July.
"Markets could increasingly be swayed towards pricing a 50 bps rate cut in September as key yields gravitate," Soumya Kanti Ghosh, member 16th finance commission, and group chief economic advisor at State Bank of India said on the Fed rate cuts.
A rate cut by the Fed is on the cards and this rate cut by the 'big daddy' would have spillover effects across the development spectrum including inducing central bankers to move to a less restrictive policy, opined Sharma. The Fed policy could have a lagged effect on the direction, pace, and sequencing of the monetary policy events in India, he added.
Apart from keeping the repo rate unchanged, economists also expect the MPC to retain the policy stance of "withdrawal of accommodation". The stance of the policy was last changed back in June 2022.
"RBI is unlikely to be comfortable with the elevated levels of food inflation in the recent months. On the other hand, domestic growth impulse has been strong giving RBI the room to keep rates at current levels until it has sufficient confidence that inflationary pressures have subsided on a durable basis," said Aditi Gupta, economist at Bank of Baroda.
SBI's Ghosh who also expects the RBI MPC to hold rates this time, sees CPI averaging 4.6-4.7 per cent in the current financial year. With monsoon progressing satisfactorily and progress of the area covered under Kharif crops showing an increase year-on-year, inflation this year is expected to remain within RBI's target. However, any excess rainfall could result in crop loss and thus negatively impact food prices, he pointed.
