The Reserve Bank of India (RBI) is likely to maintain the key interest rate at 6.5% on Thursday, awaiting more macroeconomic data before considering a rate cut, according to experts. This decision aligns with the US Federal Reserve's current stance of holding interest rates steady, with potential easing indicated for the coming months.
Amid ongoing inflationary pressures, the RBI is closely monitoring US monetary policy before altering its own stance on interest rates, which have remained unchanged since February 2023. The Monetary Policy Committee (MPC) is expected to refrain from a rate cut as economic growth is gaining momentum despite the elevated 6.5% repo rate.
The meeting of the MPC, chaired by Reserve Bank Governor Shaktikanta Das, is scheduled for 6-8 August, with Das set to announce the decision on Thursday, 8 August.
The central bank last increased the repo rate to 6.5% in February 2023 and has maintained this rate in its last seven bi-monthly reviews.
"We anticipate a status quo position in the forthcoming credit policy. Inflation remains high at 5.1%, and while this will decline numerically in the coming months, it will largely be due to the base effect," said Madan Sabnavis, Chief Economist at Bank of Baroda. He noted that economic growth is stable, suggesting the current interest rate does not hinder business activities.
"The RBI would prefer to wait and ensure that inflation is on a durable downward path before taking any action. While we do not expect changes in GDP forecasts, new guidance on inflation numbers is possible," Sabnavis added.
Aditi Nayar, Chief Economist at ICRA, remarked that the high growth in FY2024, combined with 4.9% inflation in the first quarter of the fiscal year, is unlikely to alter the voting pattern of the four MPC members who supported a status quo in June 2024.
"If the food inflation outlook improves with normal rainfall in the second half of the monsoon season, and barring global or domestic shocks, a stance change is possible in October 2024. This could be followed by a 25 bps rate cut each in December 2024 and February 2025, with an extended pause thereafter," Nayar said.
Last month, Governor Das indicated that changing the interest rate stance is premature, given the gap between current inflation and the 4% target.
Pradeep Aggarwal, Founder and Chairman of Signature Global (India), also expects the central bank to maintain the status quo due to ongoing retail inflation challenges. "We hope the central bank will adopt a more supportive stance later. A shift in stance would relieve borrowers and potentially boost housing loan uptake," Aggarwal stated.
Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund, concurred, suggesting that the RBI would keep the rate unchanged. "The MPC policy's tone may be relatively dovish, considering fiscal consolidation is on track with the fiscal deficit below 5% and global monetary easing underway," Pal noted. He added that the recent US Fed meeting also had dovish undertones.
The MPC is responsible for setting the policy repo rate to achieve a 4% inflation target while considering growth objectives. The panel includes three external members—Shashanka Bhide, Ashima Goyal, and Jayanth R. Varma—and three RBI officials.
In an off-cycle meeting in May 2022, the MPC raised the policy rate by 40 basis points, followed by subsequent hikes totalling 250 basis points between May 2022 and February 2023.
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