RBI MPC faces challenges to keep inflation under control amid global uncertainties, and is likely to keep the interest rates unchanged, say experts
The RBI’s monetary policy committee (MPC) on Tuesday started its three-day meeting to decide on the interest rates in the country. The RBI MPC faces challenges to keep inflation under control amid global uncertainties, and is likely to keep the interest rates unchanged. Experts said the recent interest rate hike by the US Fed and EU will lead to the postponement of the possibility of any reduction in the repo rate in the near future.
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The RBI governor-headed six-member Monetary Policy Committee’s (MPC) meeting will take place on August 8-10, and the policy decision will be announced on August 10 by Governor Shaktikanta Das.
Aditi Nayar, chief economist and head (research & outreach) at ICRA, said, “The recent spike in vegetable prices is set to push the CPI inflation to an uncomfortable 5.3-5.5 per cent in July 2023 (whose data is scheduled to be released later this month). We expect the vegetable price shock to result in the Q2 FY2024 CPI inflation exceeding the MPC’s last forecast of 5.2 per cent. Accordingly, we anticipate that the Committee will retain its hawkish tone in August 2023, keep the repo rate unchanged and signal that a pivot to rate cuts remains distant.”
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India’s retail inflation based on Consumer Price Index (CPI) rose to a three-month high of 4.81 per cent in June, mainly on account of hardening prices of food. The inflation, however, remains within the RBI’s comfort level of below 6 per cent. The inflation data for July will be released on August 14.
Jyoti Prakash Gadia, managing director at Resurgent India, said, “Considering the current inflation trajectory and prolonged global uncertainties, the RBI is expected to keep the repo rate unchanged in the forthcoming policy announcement on August 10.”
Gadia said the food prices are playing a spoilt sport in the attempt to control inflation and the monsoon so far is also geographically uneven, which will prompt the RBI to adopt a wait-and-watch posture and both repo rate and stance are therefore expected to continue without any change.
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“The recent interest rate increase by the US Fed and EU will lead to the postponement of the possibility of any reduction in the repo rate in the near future. At the same time, the RBI needs to support the revival and growth prospects of the economy, despite the fluid global scenario and any increase in the repo rate increase is virtually a remote proposition. Overall, a balanced view by the RBI to maintain a pause at this stage is expected,” Gadia added.
Pankaj Pathak, fund manager (fixed income) of Quantum AMC, said that since the last RBI policy, inflationary pressures have increased. Sharp jumps in vegetable prices have pushed expected inflation for the next 2-3 months above 6 per cent. Cereal and pulse prices have also moved up.
“We expect the RBI to remain on hold and maintain its policy stance as a withdrawal of accommodation. They might raise their CPI inflation forecast for FY24 by 20–30 basis points to around 5.3 per cent-5.4 per cent. A hawkish pause is widely expected and is already a part of the market psyche,” Pathak said. The last MPC meeting was held during June 6-8.
The borrowing cost, which started rising in May last year, has stabilised with the RBI keeping the repo rate unchanged at 6.5 per cent since February when it was raised from 6.25 per cent. Later, in the two bi-monthly policy reviews in April and June, the benchmark rate was retained.
The MPC consists of three external members and three officials of the RBI. The external members of the panel are Shashanka Bhide, Ashima Goyal and Jayanth R Varma. Besides Governor Das, the other RBI officials in MPC are Rajiv Ranjan (Executive Director) and Michael Debabrata Patra (Deputy Governor).
