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The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC), which is scheduled to meet from August 6-8, is likely to keep the repo rate – the key policy rate – unchanged at 6.5 per cent, due to risks from higher food inflation. Experts said that the six-member MPC is also expected to continue with the monetary policy stance of withdrawal of accommodation.
In the monetary policy, which will be announced on August 8, the rate-setting panel of the RBI is likely to maintain status-quo for the ninth consecutive policies, market experts said.
“We expect the RBI MPC to keep the policy repo rate unchanged at the August 8 meeting at 6.50 per cent, with a 4:2 vote in favor, retain the monetary policy stance of ‘withdrawal of accommodation’, sound relatively optimistic on growth, and continue to reiterate the commitment to the 4 per cent headline inflation target,” Goldman Sachs said in a report.
In the June policy, two external members – Ashima Goyal and Jayanth R Varma – voted for a 25 basis points (bps) reduction in the repo rate – the rate at which the RBI lends money to banks to meet their short-term funding needs. One basis point is one-hundredth of a percentage point.
The RBI has been raising concerns over elevated food inflation over the past many months as it could derail the disinflation path. Headline inflation, as measured by year-on-year (y-o-y) changes in the all-India consumer price index (CPI), edged up to 5.1 per cent in June 2024 from 4.8 per cent in May. The increase in inflation is attributed to food inflation which firmed up to 8.4 per cent in June compared to 7.9 per cent in the previous month.
Under the flexible inflation targeting regime, the RBI has to maintain CPI in the 2-6 per cent range. It has been targeting to bring inflation down to 4 per cent on a durable basis.
“Going forward, even though a high base last year is going to pull headline inflation down towards 4 per cent in Q3, there are upside risks to food inflation due to an uneven monsoon,” Goldman Sachs said.
Deutsche Bank’s Chief Economist (India & South Asia) Kaushik Das said that the RBI is expected to keep its FY25 real GDP (gross domestic product) growth forecast unchanged at 7.2 per cent year-on-year (y-o-y). The RBI’s inflation forecast is higher than the Deutsche Bank’s projection of 6.9 per cent y-o-y and the latest Economic Survey’s projection of 6.5-7 per cent.
In the June 2024 policy, the RBI raised its FY25 real GDP forecast by 20 bps to 7.2 per cent, from an earlier estimate of 7 per cent. It has projected CPI to be at 4.5 per cent in the current fiscal.
“As far as CPI inflation is concerned, we think there could be some upside risks to RBI’s forecast of 4.5 per cent average for FY25, particularly after the July telecom tariff hike, but it is not clear to us whether the RBI will revise its CPI forecast higher at this stage,” Das said.
“Our own CPI inflation forecast for FY25 is slightly higher at 4.6 per cent average, factoring in the telecom tariff hike and other risks, particularly related to food inflation,” he noted.
With RBI expected to leave the repo rate steady at 6.5 per cent, all external benchmark lending rates (EBLR) that are linked to the repo rate will not increase, giving relief to borrowers as their equated monthly instalments (EMIs) will not increase.
However, lenders may raise interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of a 250 bps hike in the repo rate between May 2022 and February 2023 has not happened.
In response to the 250 bps policy rate hike since May 2022, banks have revised their repo-linked EBLRs upwards. The 1-year median marginal cost of funds-based rate (MCLR) of banks increased to 168 bps during May 2022–June 2024.
Economists expect the RBI to deliver the first cut in the repo rate in December 2024.
Bank of Baroda’s Economist Aditi Gupta believes that the RBI is likely to monitor incoming data and continue to exercise caution before deciding on cutting rates. “We believe that the nearest possibility of a rate cut is December 2024,” she said.
Icra’s Chief Economist and Head of Research and Outreach, Aditi Nayar, said that if the food inflation outlook turns favourable on the back of a normal distribution of rains in the second half of the monsoon season, and in the absence of global or domestic shocks, a stance change is possible in October 2024. “This could be followed by a 25 bps rate cut each in December 2024 and February 2025, with an extended pause thereafter,” Nayar said.
