Economy
RBI may continue pause on rate hike
Summary
All 10 economists polled by Mint expect policy rates to remain unchanged. Most economists expect FY24 inflation to come in lower than RBI’s projection of 5.2%
MUMBAI : The Reserve Bank of India’s (RBI) monetary policy committee (MPC) is likely to keep the repo rate unchanged at 6.5% in the policy meeting scheduled between 6 and 8 June.
All 10 economists polled by Mint expect policy rates to remain unchanged. Most economists expect FY24 inflation to come in lower than RBI’s projection of 5.2%.
“With uncertainty from weather-related risks (like El Nino) and resilient growth keeping core inflation a tad stickier than expected, we think RBI’s inflation forecasts for the next 6-12 months are likely to be changed, albeit not materially," said Rahul Bajoria, chief India economist, Barclays. As such, Bajoria said, RBI may reduce its consumer price index (CPI) inflation projections closer to 5% from the current 5.2% average, with the bulk of the downgrades being made for first and second quarters of FY24.
Since the last monetary policy meeting, retail inflation has eased to an 18-month low of 4.7% in April, and growth has come in much higher than expected at 6.1% for the fourth quarter of the year ended in 31 March 2023.
The economists expect a further fall in retail inflation in May, as the government has been passing on softening international oil prices to retail products such as aviation fuel and LPG. RBI has projected CPI inflation at 5.2% for FY24.
The economists expect RBI to leave its growth forecast unchanged, as there are no signs of a material shift in the economic backdrop. While there may be some uncertainty from the global growth backdrop, RBI will take comfort from falling import costs. Analysts, therefore, believe RBI will leave its FY24 growth forecast unchanged at 6.5%.
Some economists said RBI may change its policy stance to neutral from the withdrawal of accommodation at present.
“Till last year, the monetary policy was ultra-accommodative, with the policy repo rate significantly below their normal levels and banking system flooded with liquidity," said Pankaj Pathak, fund manager, fixed income, Quantum Mutual Fund. Pathak said the repo rate at 6.5% is very close to its long-term average.
“Liquidity is still in surplus, but it has come down to a level which can be taken as close to normal and as non-inflationary. So, there is a strong case for RBI to retire the phrase ‘withdrawal of accommodation’," said Pathak.
The economists expect the banking system to be flush with liquidity, after the decision to withdraw ₹2,000 notes and the recent variable rate repo auction.
