RBI To Potentially Keep Interest Rate Unchanged As Inflation Remains High: Experts

Analysts expect that the Reserve Bank will maintain the status quo as retail inflation continues to be on the higher end and the US Federal Reserve recently decided to maintain a hawkish outlook. 

The Reserve Bank of India (RBI) is expected to keep the policy rates unchanged for the fourth consecutive time at it’s upcoming bi-monthly monetary policy review meeting in October, experts noted. Analysts projected that the central banking authority would maintain the status quo as retail inflation continues to be on the higher end and the US Federal Reserve recently decided to keep a hawkish outlook. 

The last time RBI made any changes to the rates was in February this year, when the bank increased the benchmark repo rate to 6.5 per cent. The regulator has maintained the same rate since then keeping in mind the high retail inflation and global factors including surging crude oil prices in the international market, reported PTI. 

The Monetary Policy Committee (MPC) meeting of the RBI, headed by the governor, is scheduled for October 4-6, 2023. The previous meeting of the panel was in August. 

Madan Sabnavis, chief economist at the Bank of Baroda, shared his expertise and said, “We do expect the RBI to hold on to a status quo position this time as inflation is still high and liquidity tight. In fact, going by RBI forecast on inflation, it would be above 5 per cent in Q3 too, which will ensure that the status quo prevails for the calendar year for sure and probably Q4 too.” 

Sabnavis further noted that unpredictabilities regarding the Kharif crop, especially pulses, remained, which can further add to the prices. “The comfort is that there is less concern on growth which is on target,” he said. 

Notably, the consumer price index (CPI) based retail inflation relaxed slightly to 6.83 per cent in August, down from 7.44 per cent in July, but it still stayed above the RBI’s comfort level of 6 per cent. Further, the government has directed the Reserve Bank to maintain inflation at 4 per cent with a 2 per cent margin on either side. 

Aditi Nayar, chief economist at ICRA Limited, noted that the headline CPI inflation is estimated to ease a bit to 5.3-5.5 per cent in September, helped by the reduction in tomato prices and a favourable base. She said, “ We expect the CPI inflation to ease to 5.6 per cent in Q3 FY2024 and further to 5.1 per cent in Q4 FY2024, amid upside risks to food inflation on account of the impact of uneven and sub-par monsoons and low reservoir levels on Kharif yields and Rabi sowing, respectively.”

Nayar stated that ICRA projects the MPC to maintain a hold in it’s October 2023 policy, ‘while continuing to demonstrate caution amid a cloudy outlook for food inflation and elevated crude oil prices’. 

Notably, the RBI estimated CPI inflation at 5.4 per cent for the fiscal year 2023-24, with the second quarter at 6.2 per cent, third at 5.7 per cent, and fourth at 5.2 per cent. For the first quarter of 2024-25, CPI inflation is expected to stay at 5.2 per cent. 

Talking about his expectations for the upcoming monetary policy meeting, Sanjay Bhutani, director at the Medical Technology Association of India (MTaI), said, “RBI has gone along with the market sentiment of retaining the benchmark interest rate at 6.5 per cent for quite some time now. However, it's time for the central bank to contemplate a reduction of the interest rate with the objective of boosting growth...If that is not possible in view of high retail inflation and the hawkish stance of the Federal Reserve, the medical technology sector, which is reeling under the burden of high debt, does expect the RBI to continue with the pause and at the same time provide some firm indication of easing rates in the near future.”

Typically, the banking regulator looks at the CPI-based inflation for deciding it’s monetary policy at the MPC meeting. The borrowing cost, after rising since May last year, has now stabilised with the RBI maintaining an unchanged repo rate at 6.5 per cent since February, the report stated. 

The MPC comprises three external members and three RBI officials. Shashanka Bhide, Ashima Goyal, and Jayanth R Varma make up the external members in the committee, while Governor Shaktikanta Das, Rajiv Ranjan (Executive Director), and Michael Debabrata Patra (Deputy Governor) are the internal members.