RBI likely to leave key interest rate unchanged at 6.5%, experts say
The central bank last raised the repo rate in February 2023 to 6.5 percent and has kept it at the same level since then. | Photo: Reuters
Experts said the Reserve Bank of India (RBI) is likely to leave the key interest rate unchanged at 6.5 percent on Thursday and wait for more macroeconomic data before making a rate cut in line with expectations.
The US Federal Reserve has decided to keep interest rates at a standstill for the time being and has indicated that monetary policy may ease in the coming months.
With inflationary pressures persisting, the RBI will closely monitor the stance of US monetary policy before changing its stance on interest rates, which have remained unchanged since February 2023, experts said.
The Monetary Policy Committee (MPC) may also refrain from cutting rates now that economic growth is picking up, despite the high interest rate of 6.5 percent (repo rate).
The meeting of the MPC, chaired by Reserve Bank Governor Shaktikanta Das, is scheduled for August 6-8. Das will announce the decision of the tariff panel on Thursday, August 8.
The central bank last raised the repo rate in February 2023 to 6.5 percent and has kept the rate at the same level in the last seven bimonthly monetary policy reviews since then.
“We expect the RBI to adopt a status quo position in the coming credit policy. Inflation is still high even today at 5.1 per cent and while it will come down numerically in the coming months, it will be more due to the base effect,” said Madan Sabnavis, chief economist, Bank of Baroda.
He further said that growth is stable, which means that current interest rates are not detrimental to businesses.
“The RBI would rather wait and see and ensure that inflation comes down on a sustainable basis before taking any action. While we do not expect any change in the GDP forecast, there is a possibility of fresh guidance on inflation numbers,” Sabnavis said.
According to Aditi Nayar, chief economist at ICRA, the high growth in FY24, coupled with inflation of 4.9 per cent in the first quarter of the current fiscal, is unlikely to change the voting behaviour of the four members who voted for status quo in the June 2024 meeting into a change of position or a rate cut in the August 2024 meeting.
“If the outlook for food inflation turns favourable based on a normal distribution of rainfall in the second half of the monsoon season, and in the absence of global or domestic shocks, a change in stance is possible in October 2024. This could be followed by a 25 basis point rate cut in December 2024 and February 2025, with a longer pause thereafter,” she said.
Last month, Governor Das said it was premature to change the stance on interest rates given the gap between current inflation and the 4 percent target.
Also, Pradeep Aggarwal, founder and chairman, Signature Global (India), said the central bank is expected to maintain status quo on interest rates for the time being as retail inflation continues to pose a challenge.
“We hope that the central bank will take a more supportive stance later.
“The likely change in attitude, when and if it happens, would give borrowers a sigh of relief, and the decline in housing loans, which is showing early signs of moderation, would likely see a revival. This shift, coupled with achieving the 4.9 percent fiscal deficit target, will benefit the overall economy, including real estate, and the sooner it happens the better,” Aggarwal said.
Puneet Pal, head of fixed income at PGIM India Mutual Fund, also felt that the RBI would leave rates unchanged.
“We expect the tone of the upcoming MPC policy to be relatively dovish as fiscal consolidation is well underway with the budget deficit below 5 percent and the global monetary easing cycle is well underway with a rate cut by the Bank of England following the rate cuts by the ECB and the Bank of Canada,” Pal said, adding that the US Fed’s last meeting earlier this week was also dovish.
The MPC is charged with the responsibility of setting the policy repo rate to achieve the inflation target of 4 percent, taking into account the growth target.
The panel consists of three external members and three officials of the RBI.
External members of the rate-setting panel are Shashanka Bhide, Ashima Goyal and Jayanth R Varma.
At an off-cycle meeting in May 2022, the MPC raised the policy rate by 40 basis points, followed by rate hikes of varying magnitude at each of the five subsequent meetings through February 2023. The repo rate was raised cumulatively by 250 basis points between May 2022 and February 2023.
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First print: Aug 04, 2024 | 3:24 PM IST