Monetary policy today: RBI likely to keep interest rates unchanged

In April policy, the MPC members, in a surprise move, unanimously decided to pause the rate hike cycle. The pause in repo rate -– the rate at which the RBI lends money to the banks to meet their short-term funding needs — in April was for the first time since the RBI started hiking repo rate in May 2022 to check inflation. RBI Governor Shaktikanta Das, however, stated that it was a pause and not a pivot, a line that he has reiterated subsequently. The RBI has hiked the repo rate by 250 basis points since February 2022.

Since the April policy, consumer price index-based inflation (CPI), or retail inflation, has eased further. It declined to an 18-month low of 4.7 per cent in April from 5.7 per cent in March, remaining under the RBI’s comfort zone of 2-6 per cent for two consecutive months. The RBI is mandated to keep CPI at 4 per cent with a band of +/- 2 per cent. Also, India’s gross domestic product (GDP) expanded at 6.1 per cent in January-March 2023 quarter, in turn pushing up the growth estimate for the full year (2022-23) to 7.2 per cent. With ease in inflation and strong GDP growth, the RBI is likely to maintain the status quo in the June policy, experts said.

“Trends for May suggest inflation could ease further close to 4 per cent year-on-year, helped by base effects, as core and non-core segments soften. Consequently, average Apr-Jun 2023 inflation is expected to undershoot the RBI’s forecast by 50-60 bps (basis points). A combination of softening inflation and robust recovery is likely to see the MPC lean towards a pause at this juncture,” said Radhika Rao, Executive Director and Senior Economist, DBS Group Research.

Analysts said that RBI’s decision to leave the repo rate unchanged will also factor in the possible pause by the US Federal Reserve in its meeting scheduled later this month. “Mixed signals from the US (labour market, manufacturing activity), has raised the probability (70 per cent) of Fed entering wait and watch mode by opting for a pause in June 2023,” Bank of Baroda said in a note.

What are the chances that the RBI will change its policy stance?

Economists said the RBI is likely to remain focused on its stance of ‘withdrawal of accommodation’ until all risks to inflation dissipate.

“The RBI will continue with the withdrawal of accommodation business till they are assured that the El Nino impact and the food risk (to inflation) is over, and then they will switch to neutral,” said Abheek Barua, Chief Economist, HDFC Bank. The liquidity condition in the banking system has improved because of the deposit of Rs 2,000 banknotes which were withdrawn from circulation last month and higher government spending. On June 6, the net liquidity surplus in the banking system stood at Rs 2.11 lakh crore, RBI data showed.

According to Bank of Baroda economist Sonal Badhan, due to withdrawal of Rs 2,000 note, the RBI’s need to infuse durable liquidity for the time being has reduced. “Thus, we expect RBI to keep its stance – “withdrawal of accommodation” – unchanged in the June 2023 policy,” she said.

Will GDP, inflation projections be revised?

In April policy, the RBI estimated real GDP growth for FY2024 at 6.5 per cent. It projected CPI inflation to be at 5.2 per cent for FY2024. While the RBI is unlikely to alter its real GDP growth forecast in today’s policy, it could revise the inflation projection downwards. “With CPI inflation tracking 50 bps (basis points) below RBI’s CPI inflation forecast of 5.1 per cent average for April-June 2023, there is scope for the central bank to revise the FY24 forecast downward to 5 per cent, from 5.2 per cent currently,” said Kaushik Das, Chief Economist, India & South Asia, Deutsche Bank.

Economists feel that the RBI will revise down the inflation forecast from an average of around 5.2 per cent for FY24 to 4.8 per cent.

What will drive the markets?

Although the general consensus in the markets is that the RBI will continue with a pause, it is the commentary on future growth and inflation which will drive the markets going ahead. The RBI’s decision on stance will also be keenly watched.

What will happen to lending, deposit rates?

If RBI keeps the policy rate unchanged in the June policy, then all external benchmark lending rates (EBLR) linked to the repo rate will not rise. It will provide some relief to the borrowers as their equated monthly instalments (EMIs) will not increase. Notably, EBLRs – 81 per cent of are linked to the benchmark repo rate – now dominate the mix of outstanding floating rate loans, with the share rising to 48.3 per cent by December 2022, whilst those based on MCLR (marginal cost of fund-based lending rate) eased to 46 per cent, DBS Group said.

Banks will also not increase fixed deposit rates in case of a pause. The decision to hold deposit rates at the current levels will be driven by surplus liquidity in the banking system due to improvement in low-cost current account and savings account (CASA) balance following the deposit of Rs 2,000 banknotes.