RBI expected to maintain interest rates amid high inflation & global factors: Report

The Reserve Bank of India (RBI) will likely keep its policy rates unchanged for the fourth consecutive time at the upcoming bi-monthly monetary policy review meeting in early October.

This stance is expected due to persistently high retail inflation and the U.S. Federal Reserve's commitment to a hawkish stance, according to government sources.

The RBI had previously raised the benchmark repo rate to 6.5 per cent on February 8, 2023, and has maintained it at this level since; citing concerns about rigid retail inflation and global factors, including hiked prices for crude oil.

Madan Sabnavis, Chief Economist at Bank of Baroda, saidthat the RBI would maintain the status quo due to high inflation and tight liquidity.

He noted, "In fact, going by RBI forecast on inflation, it would be above 5 per cent in Q3 too, which will ensure that the status quo prevails for the calendar year for sure and probably Q4 too."

Sabnavis also highlighted uncertainties surrounding the Kharif crop, particularly in pulses, which could lead to price hikes.

Retail inflation based on the Consumer Price Index (CPI) decreased somewhat from 7.44 percent in July to 6.83 percent in August, although it still exceeded the RBI's comfort level of 6 percent. The government has given the RBI a target of keeping inflation at 4 per cent with a 2 per cent margin on each side.

Expecting a further reduction in CPI inflation to 5.3-5.5 per cent in September 2023, Aditi Nayar, Chief Economist at ICRA Limited, said that there are “upside risks to food inflation due to uneven and sub-par monsoons and low reservoir levels affecting Kharif yields and Rabi sowing.”

The Reserve Bank's projections indicate CPI inflation at 5.4 per cent for 2023-24, with Q2 at 6.2 per cent, Q3 at 5.7 per cent, and Q4 at 5.2 per cent, with risks evenly balanced. CPI inflation for Q1, 2024-25 is projected at 5.2 per cent. The RBI primarily considers CPI-based inflation in its monetary policy decisions.

Sanjay Bhutani, Director of the Medical Technology Association of India (MTaI), called for the RBI to contemplate an interest rate reduction to stimulate growth, given the market sentiment of retaining the benchmark interest rate at 6.5 per cent. He also suggested that if a rate reduction is not feasible due to high retail inflation and the Federal Reserve's hawkish stance, the RBI should provide a clear indication of future rate easing, which would benefit sectors like medical technology.

Sandeep Bagla, CEO of Trust Mutual Fund, acknowledged that the interest rate environment hasdeteriorated since the last MPC policy review in August. With both the U.S. and Indian economies growth and inflation rising to alarming levels, he expects the MPC to maintain the existing repo rates. However, Bagla said that headline inflation is expected to decrease in the next few month.

The Reserve Bank has maintained the repo rate at 6.5 per cent since February, following the earlier increase from 6.25 per cent. In subsequent bi-monthly policy reviews in April, June, and August, the benchmark rate remained the same.

The Monetary Policy Committee (MPC) comprises three external members and three RBI officials, with its next meeting scheduled for October 4-6, 2023.

Governor Das leads the committee. Other RBI officialsincludeRajiv Ranjan (Executive Director) and Michael Debabrata Patra (Deputy Governor). External members include Shashanka Bhide, Ashima Goyal, and Jayanth R. Varma.

(With inputs from PTI)

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