Economists and experts said that the RBI MPC will maintain the status quo on policy rates while adopting a cautious approach before making any changes to the policy rate and stance. “Members of the MPC are likely to adopt a cautious approach, observing and analyzing inflationary trends before making any changes to the policy rate and stance. The RBI’s MPC is expected to sound cautious. We expect a status quo on policy rates in this meeting,” said Rajani Sinha, Chief Economist, CareEdge.
The Reserve Bank of India (RBI) six-member monetary policy committee has begun today and this will continue from 8th to 10th August 2023. The meeting, chaired by RBI Governor Shaktikanta Das, will discuss the current economic situation and decide the future course of monetary policy.
“In the forthcoming monetary policy meeting, RBI is likely to retain interest rates at the current level for the third consecutive time. RBI’s decision to lower the interest rate depends mainly on the inflation rate and Fed’s interest rate. If growth falls below 5.5 per cent and the Fed lowers its interest rates then only we can expect RBI to reduce the repo rate. Also, an improvement has been witnessed in liquidity post the withdrawal of Rs 2000 notes. Thus we anticipate RBI will retain the current stance on the withdrawal of accommodation. RBI’s attitude will remain cautious and will take further cues from Increase in Fed rates,” said Palka Arora Chopra, Director, Master Capital Services.
Earlier in June, the Monetary Policy Committee had decided to keep the key policy repo rate unchanged at 6.5 per cent. “MPC also decided by a majority of five out of 6 members to remain focused on withdrawal of accommodation to ensure inflation aligns with the target while supporting growth,” RBI Governor Shaktikanta Das had stated. He had also said that the standing deposit facility rate remained at 6.25 per cent, and marginal standing facility rate and bank rate remained unchanged at 6.75 per cent.
Aditi Nayar, Chief Economist and Head Research and Outreach, ICRA Ltd, said, “The surge in vegetable prices is likely to push the CPI inflation above 6 per cent in July 2023. Moreover the average for this quarter would exceed the latest estimate for Q2 that the MPC had released in June 2023. As a result, we expect the MPC’s commentary to be fairly hawkish, amid a continued pause on the repo rate.”
“What will be important to take note of is the Governor’s tone on the rising inflation. Crude prices have moved up for the sixth consecutive week on the back of tight supply and improving demand outlook. This coupled with rising vegetable prices will impose pressure on the CPI numbers for July. RBI is expected to remain data dependent going forward, though the increase in inflation prints in June and what we expect in July, the chances of interest rate cut in 2023 looks lower. Overall, We expect to remain in a ‘Higher for longer’ interest rate regime with the withdrawal of accommodation stance to continue in the August policy meet,” said Srikanth Subramanian, CEO, Kotak Cherry.
Why the status quo?
The expected status quo by the RBI MPC will be, according to economists and experts, in the backdrop of inflationary pressure, sharp hike in vegetable prices, uneven monsoon and unseasonal rains and diverging monetary policies across the world. The committee will consider two crucial factors while taking a decision on the interest rate – the significant increase in prices of vegetables, cereals and pulses and the US Fed’s decision to resume raising interest rates after a pause.
“The recent surge in food inflation surpasses the seasonal variations observed in previous years, but it is expected to be temporary in nature. Nevertheless, certain underlying factors may continue to exert upward pressure on inflation. On the other hand, the contracting WPI and softness in global commodity prices will provide some relief to the inflationary pressures with a lag,” said Rajani Sinha. She also added that monitoring the spatial distribution of monsoon, the progress of kharif sowing (especially pulses), and the recent spike in crude oil prices will be crucial.
Meanwhile, Umesh Kumar Mehta, CIO, Samco Mutual Fund, said that while status quo is given in the MPC meeting this week, the odds of interest rate hike or cut is equally poised going ahead. “Global economic and inflationary environments are still not up to the mark because of renewed strengthening of crude oil prices and surge in global food prices in extreme weather conditions,” he said.
The RBI will retain the interest rates due to the recent decline in the inflation rate, which has fallen below 5 per cent. According to the Consumer Price Index (CPI), India’s retail inflation skyrocketed to a three-month high of 4.81 per cent in June. Even though it presently remains within RBI’s acceptable range, it has an impact on the prices of vegetables and pulses which have surged. “Consequently, the upside risks in inflation will remain intact in the near future and it wouldn’t be wrong to expect a surge in inflation over the next two months. Also, incessant and uneven rainfall in a few regions may impact the supply chain negatively. But, it will not be a major concern in the text for two quarters which is a relief,” said Palka Arora Chopra. However, she maintained, it is anticipated that RBI might employ preventive measures in the next meeting, but there is no fundamental reason to consider a repo rate hike.
Also, Aditya Damani, Founder & CEO, Credit Fair added, “With the US Fed rate hike, possibility of rate cut remains distant. Having said that, MPC will definitely keep an eye on boosting consumer sentiment and capex momentum.”
Umesh Mohanan, Executive Director & CEO, Indel Money, agreed, “The RBI takes into account CPI data to assess the domestic inflation dynamics and CPI inflation is on the higher side and is showing a tendency to move out of the comfort zone of the RBI. Therefore, the central bank is likely to continue with the repo rate unchanged and continue with its current stance of ‘withdrawal of accommodation’.”