RBI MPC: Central Bank May Keep Rates Unchanged Citing Fiscal Risks After Modi's Narrow Electoral Win

RBI MPC: Economists warn that the BJP-led coalition might increase welfare spending to regain voter support, risking inflationary pressures already above the RBI's target

The RBI's record Rs 2.1 trillion ($25 billion) dividend to the government provides some leeway for increased spending.

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The Reserve Bank of India (RBI) is expected to keep its benchmark interest rate steady at 6.5 per cent for the eighth consecutive meeting this Friday, as political developments post-election stir concerns over potential fiscal populism, according to a report by Bloomberg. All 34 economists polled by Bloomberg predict the central bank will maintain its current stance.

The decision comes in the wake of Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) losing its parliamentary majority, necessitating a coalition government. Economists warn that the BJP-led coalition might increase welfare spending to regain voter support, risking inflationary pressures already above the RBI's target.

Citigroup Inc. economists Samiran Chakraborty and Baqar Murtaza Zaidi said the need for the RBI to closely monitor the upcoming Budget's fiscal outcomes before deciding on any monetary policy adjustments. "A status quo in the June policy is an even more likely outcome with the focus on reducing volatility in uncertain times," they stated.

The economists had already deferred their expectations for rate cuts to later in the year, contingent on a potential shift by the US Federal Reserve. Given the anticipated rate hold, market attention will be on RBI Governor Shaktikanta Das's perspective on the new government's fiscal strategies in the forthcoming Budget. The RBI's record Rs 2.1 trillion ($25 billion) dividend to the government provides some leeway for increased spending.

Additionally, traders will scrutinise the RBI's remarks on system liquidity, especially as India gears up for its inclusion in JPMorgan Chase & Co.'s bond index later this month.

What to Expect from Governor Das at 10 a.m. in Mumbai on Friday:

Growth and Inflation Projections

The central bank is likely to uphold its forecast of 7 per cent GDP growth and 4.5 per cent average inflation for the fiscal year ending March 2025. Governor Das has indicated that the RBI will not alter its rate policy until inflation consistently aligns with the 4 per cent target. April’s inflation rate stood at 4.83 per cent. With last fiscal year’s growth surpassing 8 per cent, the RBI has substantial justification to maintain higher rates.

Monetary Policy Stance

Since June 2022, the RBI has adhered to a hawkish stance of "withdrawal of accommodation." Most economists do not foresee any immediate change in this approach, as a shift might imply the central bank is preparing to ease policy, which appears premature given the current economic and political landscape.

As the RBI navigates these uncertain times, its upcoming decisions and statements will be critical in shaping market expectations and maintaining economic stability.