RBI likely to keep interest rates unchanged in upcoming April, June policy meetings: Report

  • All 56 economists who took part in the March 15-22 Reuters poll expected the RBI to hold the repo rate at 6.50 per cent at the conclusion of its upcoming April 3-5 meeting.

Livemint, Written By Nikita Prasad
First Published26 Mar 2024
RBI is likely to hold rates steady in April and June meetings. Photo: Aniruddha Chowdhury/Mint
RBI is likely to hold rates steady in April and June meetings. Photo: Aniruddha Chowdhury/Mint

The Reserve Bank of India (RBI) is likely to keep interest rates unchanged until at least July, a bit longer than the US Federal Reserve is expected to do so, over strong economic growth and still-elevated inflation, according to a majority of economists who participated in a poll conducted by news agency Reuters.

India's gross domestic product (GDP) beat RBI's and Street estimates in the October-December quarter of FY24, growing at a rate of 8.4 per cent -- the fastest among major economies. Retail inflation, which is still close to the upper band of the central bank's two per cent-six per cent target, does not imply rate cuts. 

All 56 economists who took part in the March 15-22 Reuters poll expected the RBI to hold the repo rate at 6.50 per cent at the conclusion of its upcoming April 3-5 meeting. The economists were, however, divided on when the first cut would come in 2024. The median forecasts put the rate at 6.25 per cent by the end of September and six per cent at the end of this year.

Also Read: India's real GDP growth at 6-quarter high in Q3FY24 driven by indirect taxes, lower subsidies: RBI

Interest rates of central banks in near-past

The Russia-Ukraine war acted as a catalyst, leading to a sharp pickup in commodity prices, especially oil. This was also fed into prices of other goods and services, which led to a significant pass through into core inflation.

Amongst major central banks, the US Federal Reserve (March 2022) and the European Central Bank (July 2022) were amongst the last to raise rates. In India, the policy tightening commenced from May 2022, with the repo rate being increased to 4.4 per cent.

During this phase, India’ policy rate differential with US, UK and Europe increased as RBI front loaded its first rate hike and raised repo rate by 40 basis points (bps). One basis point is one-hundredth of a percentage point.

While inflation in several developed and emerging markets trailed much above the central banks’ targets, tightening labor market conditions also impinged on price stability. Central banks moved quickly to increase rates to a sufficiently restrictive level and keep them there, until policymakers were sure that inflation would return to target. This marked the peak in the interest rate cycle.

Also Read: RBI MPC Minutes: Job on inflation front not over, ‘last mile’ of disinflation can be sticky; 5 key highlights

For most of the central banks, this point was reached during H2CY2023. For the US, the policy rate peaked in July 2023 to 5.5 per cent, starting from March 2022. In comparison, in India policy rate was at its peak within nine months from the start of the rate cut cycle.

‘’In terms of the magnitude of rate hikes, India has been at the lower end, increasing policy rate by only 250 bps (from COVID-19 low). In fact, the increase in case of India has brought the policy rate to the average in the last ten years or so,'' said Aditi Gupta, Economist, Bank of Baroda.

What's next for central banks?

The policy rate differential between India and US stands at 100 bps which is considerably lower than historical levels. This is because the US Fed was much more aggressive than the RBI to raise rates. A lower rate differential implies a lower premium for foreign investors and hence lesser foreign inflows. However, this does not seem to hold in relation to India.

Foreign capital inflows into India have remained buoyant, as India’s growth momentum is expected to remain strong. While the US Fed has already indicated that policy rates are likely to be reduced in the coming months, the growth and inflation dynamics in India suggests that RBI may just keep rates elevated for longer than that. 

 

 

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