RBI likely to keep interest rate unchanged as inflation still high: Experts
The Reserve Bank of India (RBI) is expected to maintain its current policy rates in the upcoming bi-monthly monetary policy review meeting, which is scheduled for early next month. This would mark the fourth consecutive time that the RBI has opted to keep the rates unchanged. The central bank had previously raised the benchmark repo rate to 6.5 percent on February 8, 2023, and since then, it has refrained from making any further adjustments. The decision to maintain the status quo is primarily attributed to several key factors.
One significant factor is the persistent issue of high retail inflation in the country. Experts suggest that the RBI is likely to exercise caution in reducing rates due to this ongoing concern. Additionally, certain global factors, such as elevated crude oil prices in the international market, have also played a role in shaping the central bank’s policy stance.
Furthermore, the recent decision by the US Federal Reserve to maintain a hawkish stance for a longer duration has implications for the RBI’s decision-making process. This external influence may contribute to the RBI’s inclination to keep rates steady.
The upcoming meeting of the Monetary Policy Committee (MPC), headed by the RBI Governor, is scheduled for October 4-6, 2023. The last meeting of this influential rate-setting panel took place in August. Experts anticipate that the RBI will continue to maintain the status quo in the face of high inflation and liquidity constraints. Uncertainties related to the Kharif crop, particularly concerning pulses, may also pose a risk to price stability, adding another layer of complexity to the RBI’s policy considerations.
“The comfort is that there is less concern on growth, which is on target,” stated the expert. This suggests that while there may be some concerns about inflation, the overall economic growth is aligning with expectations.
In August, the Consumer Price Index (CPI)-based retail inflation showed a slight decrease, dropping to 6.83 percent from 7.44 percent in the preceding month of July. However, it remained above the Reserve Bank of India’s comfort level of 6 percent. This implies that inflation is still a matter of concern for policymakers.
It’s worth noting that the government has set a target for the RBI to maintain inflation at 4 percent with a permissible margin of 2 percent on either side. This means that the central bank’s preferred inflation range is 2 to 6 percent.
Aditi Nayar, the Chief Economist at ICRA Limited, provided an outlook, suggesting that headline CPI inflation is expected to ease further in September 2023, reaching a range of 5.3 to 5.5 percent. This improvement is expected to result from factors like a significant drop in the average price of tomatoes and a favorable base effect, which would contribute to lower inflation.
According to Aditi Nayar, Chief Economist at ICRA Limited, there are expectations that Consumer Price Index (CPI) inflation will ease further. She stated, “We expect the CPI inflation to ease to 5.6 percent in Q3 FY2024 and further to 5.1 percent in Q4 FY2024.” However, she pointed out certain risks to this outlook, particularly related to food inflation. These risks stem from factors such as the impact of uneven and sub-par monsoons on Kharif yields and low reservoir levels affecting Rabi sowing.
Nayar also suggested that ICRA anticipates the Monetary Policy Committee (MPC) to keep the policy rates unchanged in the October 2023 policy meeting. The caution is driven by concerns about food inflation and elevated crude oil prices, which contribute to an uncertain economic outlook.
The Reserve Bank of India (RBI) has its own projections for CPI inflation. According to the RBI, CPI inflation is expected to be at 5.4 percent for the fiscal year 2023-24, with specific estimates for different quarters. For instance, the RBI anticipates CPI inflation at 6.2 percent in Q2, 5.7 percent in Q3, 5.2 percent in Q4 of FY2024, and 5.2 percent for Q1 of FY2024-25.
Sanjay Bhutani, Director of the Medical Technology Association of India (MTaI), expressed the need for the RBI to consider reducing interest rates to stimulate growth. However, he acknowledged that this might be challenging due to high retail inflation and the hawkish stance of the US Federal Reserve. He hoped that even if the RBI doesn’t immediately cut rates, it would provide indications of potential rate easing in the near future, which could benefit sectors like medical technology.
Sandeep Bagla, CEO of Trust Mutual Fund, observed that the interest rate environment has become more challenging since the last MPC policy review in August. Both the US and Indian economies have shown resilient growth, but inflation numbers have risen beyond comfort levels, making the decision-making process for the RBI more complex.
The expert mentioned that while food prices have shown a softening trend, crude oil prices have been on the rise. This increase in crude oil prices has led to heightened inflationary expectations, as evidenced by a significant increase in US treasury yields. In light of these factors, the Monetary Policy Committee (MPC) will carefully consider all these variables in their decision-making process. The expectation is that the MPC will likely maintain the status quo on repo rates, primarily because headline inflation is anticipated to decrease in the upcoming months.
It’s important to note that the Reserve Bank of India (RBI) primarily takes into account the Consumer Price Index (CPI)-based inflation when formulating its bi-monthly monetary policy decisions.
The cost of borrowing, which had been steadily rising since May of the previous year, has now stabilized. The RBI has kept the repo rate unchanged at 6.5 percent since February, when it was raised from 6.25 percent. Subsequently, in the following three bi-monthly policy reviews held in April, June, and August, the benchmark rate was retained.
The Monetary Policy Committee (MPC) is comprised of both external members and officials from the RBI. The external members on the panel are Shashanka Bhide, Ashima Goyal, and Jayanth R Varma. In addition to Governor Das, the other RBI officials on the MPC are Rajiv Ranjan (Executive Director) and Michael Debabrata Patra (Deputy Governor). These individuals collectively make decisions regarding the monetary policy of the RBI, taking into account various economic factors and objectives.