The Reserve Bank of India (RBI) is expected to maintain its benchmark interest rate during its upcoming bi-monthly monetary policy review later this week, as retail inflation remains a significant concern and geopolitical tensions in the Middle East could further impact crude oil and commodity prices, experts say.
Earlier this month, the government restructured the RBI's Monetary Policy Committee (MPC), which will hold its first meeting with three newly appointed external members starting Monday.
The committee, chaired by RBI Governor Shaktikanta Das, will announce the results of their discussions on Wednesday, October 9.
The RBI has kept the repo rate—the short-term lending rate—unchanged at 6.5% since February 2023, with analysts predicting that any potential easing might only occur in December.
The government has tasked the central bank with ensuring that Consumer Price Index (CPI)-based retail inflation remains at 4% with a margin of 2% on either side.
Experts believe the RBI is unlikely to follow the US Federal Reserve, which recently lowered its benchmark rates by 50 basis points. "We do not expect any change in the repo rate or stance by the MPC," said Madan Sabnavis, Chief Economist at Bank of Baroda. "Inflation for September and October is likely to exceed 5%, and core inflation is also rising."
Sabnavis added that the ongoing Iran-Israel conflict poses additional uncertainties. He anticipates that the MPC will maintain the status quo, with possible adjustments to inflation forecasts but no changes to GDP predictions.
Icra Chief Economist Aditi Nayar noted that with the first quarter GDP growth falling short of the MPC's expectations, a shift to a neutral stance might be appropriate in the October policy review.
She suggested that this could lead to a gradual rate-cutting cycle of 25 basis points in December 2024 and February 2025.
An HSBC report indicated that recent developments—such as softer growth figures, falling inflation, and a global trend towards rate cuts—might prompt the RBI to adjust its stance to neutral in the upcoming meeting, followed by repo rate cuts.
Despite calls for a rate reduction from sectors like real estate, experts believe the RBI will likely keep rates unchanged for the tenth consecutive meeting. "The central bank remains cautious due to persistent retail inflation, particularly in food prices," said Pradeep Aggarwal, founder and chairman of Signature Global (India) Limited.
Mandar Pitale, Head of Treasury at SBM Bank India, echoed this sentiment, suggesting that the MPC will continue its restrictive policy until inflation aligns with the 4% target.
The newly appointed external members of the MPC are Ram Singh, Saugata Bhattacharya, and Nagesh Kumar, replacing Ashima Goyal, Shashanka Bhide, and Jayanth R Varma.
Other internal members include RBI Deputy Governor Michael Debabrata Patra and Rajiv Ranjan, Executive Director of the monetary policy department.
Since May 2022, the MPC has raised the policy rate by a cumulative 250 basis points, with the last hike occurring in February 2023.
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