RBI MPC Review: Experts Predict Status Quo On Key Interest Rates Amid Tensions In Middle East

This newly formed panel is having its first meeting with MPC Chairman and RBI Governor Shaktikanta Das, set to announce the outcomes of the three-day discussions on Wednesday

Experts suggest that the Reserve Bank of India is unlikely to lower the benchmark interest rate in its bi-monthly monetary policy review meeting, as retail inflation remains a significant concern. Additionally, the ongoing crisis in the Middle East could worsen, potentially affecting crude oil and commodity prices.

Earlier this month, the government restructured the Reserve Bank's rate-setting panel, the Monetary Policy Committee (MPC), introducing three new external members. This newly formed panel is conducting its first meeting with MPC Chairman and RBI Governor Shaktikanta Das, set to announce the outcomes of the three-day discussions on Wednesday.

The Reserve Bank of India (RBI) has maintained the repo rate at 6.5 per cent since February 2023, and experts suggest that any potential easing may only occur in December. The government has tasked the central bank with keeping Consumer Price Index (CPI)-based retail inflation at 4 per cent, allowing for a 2 per cent margin on either side.

With all these happening, analysts believe the RBI is unlikely to mirror the US Federal Reserve's recent decision to lower benchmark rates by 50 basis points.

"We do not expect any change in the repo rate or stance by MPC. The reason is that inflation for September and October will be above 5 per cent, and the present low inflation is due to the base effect. Besides, core inflation is inching upwards," said Madan Sabnavis, Chief Economist, Bank of Baroda.

Additionally, he noted that the ongoing tensions between Iran and Israel could escalate, creating further uncertainty in the region. "Hence, the status quo is the most likely option, even for new members. Inflation forecast may be lowered by 10-20 bps, and no change in GDP forecast likely," said Sabnavis.

Icra Chief Economist Aditi Nayar stated that due to the lower-than-expected GDP growth in the first quarter compared to the MPC's forecast and a significant potential undershooting in the second quarter CPI inflation, "we believe a stance change to neutral may be appropriate in the October 2024 policy review."

She also mentioned that this could lead to a gradual rate-cutting cycle, with reductions of 25 basis points each in December 2024 and February 2025. "The abundant monsoon offers some insurance for crop inflation. The impact of global political developments and geopolitical uncertainty on the growth inflation dynamics remains a risk," Nayar said.

Pradeep Aggarwal, founder and chairman of Signature Global (India) Limited, stated that while the real estate industry, developers, and homebuyers are optimistic about a potential interest rate cut in the upcoming monetary policy review, the RBI is likely to maintain its stance and refrain from cutting rates for the tenth consecutive time.

"The apex bank still seems uncomfortable with the overall retail inflation scenario, particularly food inflation. As such, it is expected to maintain the status quo. The recent interest rate cut by the US Federal Reserve has ignited similar hopes even in India, but the domestic scenario is very different," he added.