RBI MPC meet underway: Central bank likely to keep repo rate steady; 4 crucial reasons why

RBI MPC is expected to maintain current policy rates and stance amidst food price volatility and global factors.

Nishant Kumar
Published6 Jun 2024, 11:46 AM IST
RBI MPC began its three-day meeting on Wednesday, June 5, and the decision is due on Friday, June 7.
RBI MPC began its three-day meeting on Wednesday, June 5, and the decision is due on Friday, June 7.(Agencies)

RBI MPC meet: The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) commenced its June policy meeting in the backdrop of robust economic growth and declining inflation. Given the volatility in food prices, ongoing geopolitical tensions, and the Federal Reserve's extended pause on interest rates, the central bank is expected to maintain its current policy rates and stance.

RBI MPC began its three-day meeting on Wednesday, June 5, and the decision is due on Friday, June 7.

Also Read: RBI Monetary Policy Committee Meeting this week: Date, time and what to expect

When formulating its monetary policy, the RBI prioritises inflation and economic growth. Currently, the central bank has little cause for concern on either front. 

India's Consumer Price Index (CPI)- based inflation, also known as retail inflation, eased to an 11-month low of 4.83 per cent in April, while the country's gross domestic product (GDP) for FY24 beat estimates by coming at 8.2 per cent.

Also Read: RBI MPC meet begins today: Can the central bank trim repo rate or tweak its policy stance in June ? Experts weigh in

RBI last hiked the repo rate to 6.5 per cent in February 2023. As per experts, the central bank may keep the benchmark policy rates at the current level until October.

Brokerage firm Nirmal Bang expects the RBI’s MPC to keep policy rates on hold on June 7, while the stance is also expected to be maintained as a ‘withdrawal of accommodation’ although liquidity remains relatively tight.

Let's take a look at four key reasons that may lead the RBI MPC to maintain a status quo on policy rates and stance.

Volatile food prices

Even though headline inflation has eased thanks to benign core inflation, the volatility in food prices remains a key concern.

"The food and beverages inflation remains elevated, averaging 7.7 per cent in the first four months of CY24, led by double-digit inflation in vegetables and pulses. Sustained inflationary trends in non-perishable food categories, such as pulses, spices and cereals raise concerns about the potential broadening of price pressures due to their inherent stickiness," said CareEdge.

The Fed factor

Analysts say it is highly improbable that the RBI will precede the US Fed in cutting policy rates as the interest rate differential between the US and India is at historic lows.

YES Bank believes the RBI will cut rates only after the Fed rate cut cycle starts. Fed will likely cut rates in September.

"The RBI has also been indicating that India’s monetary policy reaction function crucially depends on domestic conditions and US Fed may not have much of an impact. However, we think that RBI is unlikely to precede the Fed in this rate-cutting cycle as the interest rate differential between the two economies is at historic lows," said YES Bank.

CareEdge believes that the RBI MPC will contemplate rate cuts in the second half of FY25, as the RBI will likely have gained further clarity on the risks associated with food inflation and the policy outlook of the US Fed by then.

Nirmal Bang believes the delay in the Federal Reserve’s rate cut cycle and strong GDP growth (8.2 per cent in FY24 against the second advance estimate of 7.6 per cent) will give the RBI confidence to maintain the stance and the policy space to remain focussed on price stability for now.

The brokerage firm expects a change in stance by August or October, assuming a good monsoon and indications that the Fed will initiate rate cuts.

Moderation in growth and CPI inflation may create a suitable environment for a rate cut in the second half of the financial year (H2FY25).

"High-frequency indicators, while resilient, indicate some signs of moderating growth. Credit growth has also started to moderate at the margin. CPI inflation will likely moderate further over the next few months, although we do not rule out some volatility in food prices. Finally, high real rates are likely to impinge on growth with a lag. Consequently, we expect a shallow rate cut cycle of nearly 50bps in H2FY25," said Nirmal Bang.

Also Read: India’s service PMI eases to five-month low in May

The 4% inflation target still far

Analysts at YES Bank believe it is highly unlikely that the RBI will deviate from the 4 per cent inflation target. They expect the RBI to remain on an extended pause and see a cut in October. YES Bank believes the rate cut cycle will be shallow at nearly 50 bps in FY25.

"The upcoming monetary policy in June is unlikely to change the rates or the stance. Given various uncertainties to the inflation trajectory and stronger growth momentum, RBI has desisted from providing any forward guidance on monetary policy and this strategy is expected to continue," YES Bank said.

Analysts at CareEdge point out that given that the RBI Governor has been highlighting the aim of getting inflation to 4 per cent on a durable basis, the policy rates are likely to be kept on hold in the upcoming policy meeting, with no change in stance.

"The RBI will continue managing liquidity to support money market conditions," said CareEdge.

Clarity on the policy front

The RBI has another reason to wait and watch: After the Lok Sabha election, the central bank needs to closely observe the direction of the policies and the Union Budget next month.

Also Read: NDA’s slim victory could delay far-reaching reforms: Moody’s

Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.

 

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First Published:6 Jun 2024, 11:46 AM IST
HomeEconomyRBI MPC meet underway: Central bank likely to keep repo rate steady; 4 crucial reasons why

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