RBI Monetary Policy: Economists Expect Central Bank To Hold Rates Steady
According to the 71 economists surveyed, the RBI would keep its key repo rate unchanged at 6.50 per cent at the end of the October 4-6 meeting, with one expecting a 25 basis point hike
The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) is widely expected to keep key rates on hold when it announces its decision on Friday, according to Reuters. However, the recent uptick in global crude oil prices and sustained economic growth are likely to keep MPC’s focus on inflation. According to the 71 economists surveyed by Reuters in late September said the central bank would keep its key repo rate unchanged at 6.50 per cent at the end of the October 4-6 meeting, with one expecting a 25 basis point hike.
YES Bank economists Indranil Pan and Deepthi Mathew said, "Even as the worst of inflation is behind us and core retail prices are on a downward journey, we would still expect the RBI to maintain a bit of hawkishness on inflation dynamics, given various uncertainties such as climate conditions, commodity prices and global risk positioning.”
Annual retail inflation in August was 6.83 per cent, easing from 7.44 per cent in July, a 15-month high, but remained well above the RBI’s 2-6 per cent comfort level. The RBI has forecast inflation at 5.4 per cent in 2023/24 but Deutsche Bank expects it to raise that view to 5.5-5.7 per cent on Friday, while keeping the GDP forecast unchanged at 6.5 per cent.
High inflation has put the focus back on liquidity management amid the reduced ability to keep hiking rates at the risk of hurting growth and that is likely to continue at the upcoming policy review.
Analysts don't expect the central bank to change its stance from 'withdrawal of accommodation' and expect to see continued measures to ensure the banking system liquidity remains tight without hurting economic growth. "The bigger concern is if the RBI would opt for a CRR (cash reserve ratio) rate hike to tighten liquidity and improve transmission this time around - after introducing the Incremental-CRR in the last policy," the HDFC Bank treasury desk said. "We think it is unlikely that the central bank would look at tightening liquidity through more permanent measures like CRR at this stage," they said, adding they expect more fine-tuning of variable rate repo and reverse repo operations to manage liquidity.
With US interest rates expected to remain higher for longer, market participants are pushing rate cut bets from the RBI to the second quarter of 2024.
Economy grew at its quickest pace in a year in the April-June quarter, expanding 7.8 per cent on year, buoyed by strong services activity and robust demand, but a five-year low monsoon rainfall could restrain future growth.
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