‘Goldilocks’ economics will prompt RBI to leave interest rates unchanged: economists

The RBI has plenty of room to stay on hold in the near term, Barclays said in a note | Photo: Bloomberg

Strong economic growth and moderating inflation mean India’s central bank will have room to leave rates unchanged at this week’s review and likely until July, economists say.

The Reserve Bank of India (RBI) is widely expected to leave interest rates unchanged for the seventh straight meeting on Friday.

All 56 economists in the March 15-22 Reuters poll expected the RBI to keep the repo rate at 6.50 percent, while most expect no change at least until July.

The RBI has ample headroom to remain on hold in the near term, Barclays said in a note.

The central bank last changed interest rates in February 2023, when the policy rate was raised to 6.5 percent.

‘We think the RBI will have to balance the risks between excessive tightening (given the ‘not-too-hot-nor-too-cold’ state of the economy) and maintaining monetary policy conditions to achieve a reasonable good real GDP growth of at least 7.0 percent,” Barclays economists wrote, referring to the proverbial “Goldilocks” ideal of stable economic growth.

As India heads into general elections this month, the economy is growing faster than expected, while there are signs of falling prices, although food inflation remains a risk.

Prime Minister Narendra Modi said at an event on Monday that the RBI should give top priority to growth but at the same time focus on confidence and stability. Modi’s Hindu nationalist Bharatiya Janata Party is expected to score a comfortable victory in elections for the third time in a row from April 19.

India’s economy grew by 8.4 percent in the fourth quarter of 2023, the fastest among major economies, while retail prices rose faster than expected by 5.09 percent in February on higher food prices, and above 4 percent of the RBI remained. cent target.

In February, one of the six members of the monetary policy committee voted to cut the policy rate, arguing that real interest rates in India are too high as inflation is expected to ease to an average of 4.5 percent in 2024-25.

“India’s growth is robust compared to the rest of the world, but not compared to our potential or ambitions,” Jayanth Varma, an external member of the monetary policy committee, told Reuters.

But central bank governor Shaktikanta Das has repeatedly said it is premature to ease policy before inflation returns to the 4 percent target.

India’s headline inflation has remained above the central bank’s target and core inflation has fallen below 4 percent, which some say could allow the central bank to signal future policy easing.

The current monetary policy stance is ‘withdrawal of easing’, indicating that monetary policy is likely to remain tight.

“We don’t expect any change in the policy rate, but a likely explicit or implicit change in stance cannot be ruled out,” said Parijat Agrawal, head of fixed income at Union Mutual Fund.

The RBI’s monetary policy is independent, but that has not stopped governments in the past from pressuring the central bank for looser credit policies to support growth.

“On the margins, the RBI will prefer to stay on the sidelines to avoid any flare-up of concerns about its independence,” said Thamashi De Silva, assistant Indian economist at Capital Economics.

(Only the headline and image of this report may have been reworked by Business Standard staff; the rest of the content is automatically generated from a syndicated feed.)

First print: April 3, 2024 | 2:03 PM IST