RBI rate, stance to stay on pause: Poll

The expectation, therefore, is that the rate-cutting cycle is likely to begin only by the first half of the next fiscal year. (Rueters)
The expectation, therefore, is that the rate-cutting cycle is likely to begin only by the first half of the next fiscal year. (Rueters)

Summary

Inflation has quickened since June, particularly in vegetables

MUMBAI : The Reserve Bank of India’s (RBI) monetary policy committee (MPC) is likely to leave interest rates and policy stance unchanged at its meeting this week, according to a Mint survey of 10 economists. The expected status quo will be in the backdrop of a sharp spike in vegetable prices, uneven monsoon and diverging monetary policies worldwide.

All economists expect MPC to keep the repo rate unchanged at 6.5% and retain the stance of withdrawal of accommodation. While the majority expects RBI to maintain a prolonged pause after the August policy, the market is pencilling in a 50% chance of 25 basis points (bps) hike over the next two RBI meetings.

Graphic: Mint
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Graphic: Mint

Since the last policy in June, inflationary pressures have increased, with vegetable prices seeing a sharp jump. This is likely to keep headline consumer price inflation above 6% over the next two-three months before it starts slowing down. Core inflation is likely to remain relatively comfortable, averaging at around 4.7% for the rest of FY24.

Economists, however, expect RBI to put the onus on more effective administrative measures to quell rising food prices rather than tap monetary policy tools. The expectation, therefore, is that the rate-cutting cycle is likely to begin only by the first half of the next fiscal year.

“We expect MPC to extend its pause on 10 August and keep the stance unchanged at ‘withdrawal of accommodation’. The accompanying commentary is expected to reflect their vigilance on inflation whilst highlighting the supply-driven nature of the recent run-up," said Radhika Rao, senior economist at DBS Bank. “Not only are rate cut expectations getting priced out, but our rates strategists also noted earlier this week that the overnight indexed swap (OIS) curve appears to be pricing for around 40-50% likelihood of a 25-bps hike over the next two RBI meetings. Inflation concerns coupled with firmer oil and uptick in US treasury yields have driven INR 10Y yields up in the past week," Rao added.

Madan Sabnavis, chief economist at Bank of Baroda, said that inflation, while being lower than 5% in June, is expected to quicken to 6% in July. “The prices of vegetables, as well as pulses, will continue to exert upward pressure on food inflation. GDP (gross domestic product) growth in the first quarter is expected to be closer to 8%, thus indicating stability. There is, hence, no compelling reason to spur growth presently," Sabnavis said. Hence, the repo rate will remain unchanged till the end of the calendar year, Sabnavis said, adding the US Federal Reserve has indicated a possible hike in the future. Treasury yields have moved up, and with liquidity being comfortable, the stance of withdrawal of accommodation will remain, he added.

The majority also expects RBI to revise the inflation forecast moderately higher to 5.3%-5.4% for FY24 from the current estimate of 5.1%.

While inflationary pressures have risen, there are no new risks to growth projections. A stronger-than-expected momentum in domestic investments resulted in major international agencies like International Monetary Fund (IMF) revising India’s growth projections to 6.1% from 5.9% earlier this year. Economists, therefore, expect RBI to maintain its growth projections at 6.5% for FY24. That said, the bond market will keep a close watch on RBI’s assessment of the current spike in food prices and its impact on the overall inflation outlook and monetary policy.

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