The Reserve Bank of India (RBI) is expected to keep the key interest rate unchanged at 6.5% in the upcoming Monetary Policy Committee (MPC) meeting scheduled for August 6-8, according to experts from foreign banks and brokerages. The central bank is also likely to retain its monetary policy stance as “withdrawal of accommodation.”
Since February 2023, the RBI has maintained the repo rate at 6.5% after raising it six times consecutively from May 2022 to February 2023, increasing it from 4% to the current level. Economists point out that inflation breaching the 5% mark in June and persistent pressures from elevated food prices are likely to influence the decision to maintain the status quo.
Shreya Sodhani, Regional Economist at Barclays, noted, “Enduring upward food price pressure on headline inflation will likely keep the MPC cautious in August. We expect the MPC to keep policy settings unchanged in a 4-2 vote.”
Barclays anticipates that the RBI may delay rate cuts beyond December due to steady economic growth, expecting the window for a rate cut to open only in December 2024, with potential delays into 2025. Santanu Sengupta, Chief Economist at Goldman Sachs India, shared similar expectations, stating, “We expect the RBI MPC to keep the policy repo rate unchanged at the Aug 8 meeting at 6.5 percent, 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 percent headline inflation target.”
Sengupta highlighted that recent growth indicators have been mixed, with urban consumption expected to remain muted even as rural activity shows signs of recovery.
RBI to hold steady in August
He added, “Elevated and broad-based food inflation has kept H1 CY24 headline inflation near 5 percent year-on-year, even as core inflation continued to decline. There are upside risks to food inflation due to an uneven monsoon.”
Radhika Rao, Executive Director and Senior Economist at DBS Bank, also expects a status quo on rates in the August meeting, with an extended pause until the end of the year.
She noted that a recent RBI staff study implied that the economy’s stronger output trend reduces the need for additional stimulus via rate cuts. Markets will closely monitor the US Federal Reserve’s policy bias at its September meeting, which could influence the RBI’s policy stance. Rao mentioned that a dovish forward guidance by the Fed might prompt Asian central banks, including the RBI, to adopt a less restrictive policy, albeit with a delay.
Overall, with food inflation continuing to exert pressure, the RBI is seen exercising caution by maintaining existing policy rates in the upcoming MPC meeting.
