BackRBI may keep repo rate unchanged for fourth time
Most economists expect the repo rate to stay unchanged at 6.5% and the policy stance at the withdrawal of accommodation
PremiumThe Reserve Bank of India (RBI) is likely to maintain its monetary policy rates and stance for the fourth time in a row this week, economists polled by Mint said, amid elevated retail inflation and a hawkish US Federal Reserve.
Most economists expect the repo rate to stay unchanged at 6.5% and the policy stance at the withdrawal of accommodation. Even as core inflation has continued to cool, retail inflation remains above RBI’s target band, and the central bank may keep a close watch on uneven monsoon rains and rising crude oil prices.
“We expect the MPC (monetary policy committee) to remain on hold in the October policy while continuing to demonstrate caution amid a cloudy outlook for food inflation and elevated crude oil prices. In Icra’s view, inflation would need to persist above 6% for at least two quarters, amid transmission of pressures to core inflation, to set the stage for a rate hike," said Aditi Nayar, chief economist at Icra.
Since the last policy in August, inflation has posed a mixed picture. Tomato prices, which spiked earlier, have plunged, and core inflation has fallen to a four-year low. Crude prices are, however, up 10% since August, putting pressure on consumer price inflation. CPI inflation, which stood at 6.83% in August, is expected to fall within RBI’s threshold of 2-6% in September.
Economists expect RBI to also keep the retail inflation forecast unchanged at 5.4% and GDP growth at 6.5% for FY24.
Liquidity, which was in surplus earlier, turned into a deficit after RBI introduced the 10% incremental cash reserve ratio (ICRR) in the last policy. The market expects RBI to maintain enough liquidity to not impair credit demand during the festive season.
The liquidity deficit is expected to moderate thanks to some government spending and the reversal of ICRR impact, said Upasna Bhardwaj, chief economist of Kotak Mahindra Bank. “We expect RBI to keep liquidity tight in the near term to keep short-term rates elevated, given the pressure on the rupee and underlying inflationary risks. We expect liquidity to normalize towards the surplus zone by early October amid the government’s month-end spending," Bhardwaj said.
The market will also keenly watch RBI’s commentary on India’s inclusion in the global bond indices. On 21 September, JPMorgan decided to include India in its GBI-EM Global series starting June 2024. This move is expected to see capital inflows of $25 billion.
“While the index inclusion should structurally augur well for lower cost of borrowings for the economy at large, it will also come with more accountable fiscal policy-making and more deft monetary policy-making ahead—with RBI likely managing problems of plenty," said D.K. Joshi, chief economist at Crisil.
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