The Reserve Bank of India (RBI) is widely expected to keep rates unchanged on Friday for the seventh consecutive meeting. The first Monetary Policy Committee (MPC) meeting has already started and economists feel that due to strong economic growth and moderating inflation, the central bank has room to hold rate revision until July.
The current repo rate is 6.50%, which was last updated on February 8, 2024. Since then the RBI decided to keep the rate unchanged. The last time the repo rate was changed from 6.25% to 6.50% in February 2023.
The RBI has ample room to remain on hold in the near term, Barclays said in a note.
"We think the RBI will have to consider the balance of risks between over tightening (given the 'not-too-hot-nor-too-cold' state of the economy) and maintaining monetary policy conditions for achieving reasonably good real GDP growth of at least 7.0%," Barclays economists wrote, mentioning the proverbial "Goldilocks" ideal state of stable economic growth.
India's economy surged by 8.4% in Q4 2023, leading major economies. Retail prices spiked by 5.09% in February, driven by high food costs, surpassing the RBI's 4% target. This growth poses both opportunities and challenges for India's economic landscape, Reuters reported.
CPI inflation has been above RBI’s 4 per cent target, but core inflation has been below 4 per cent for the last three months, with continued disinflation in the services sector. Food inflation at a high of 7.8 per cent (latest February data) remains a concern, with very high inflation for vegetables (30 per cent), pulses (19 per cent) and spices (14 per cent).
As India heads into a general election this month, the economy is growing faster than expected amid signs prices are trending lower though food inflation remains a risk.
In February, one of six monetary policy committee members voted for a cut in policy rates arguing that real rates in India are too high since inflation is seen easing to an average of 4.5 per cent in 2024-25.
"India's growth is robust when compared to the rest of the world, but not when compared to our potential or to our aspirations," monetary policy committee's external member Jayanth Varma told Reuters.
But central bank governor Shaktikanta Das has repeatedly said that it is premature to ease policy before inflation returns to the 4 per cent target.
The current monetary policy stance is 'withdrawal of accommodation', signalling that monetary policy will likely remain tight. "We do not expect any change in the policy rate, but a probable explicit or implicit change in stance cannot be ruled out," said Parijat Agrawal, head of fixed income at Union Mutual Fund.
The State Bank of India in a note said the RBI will maintain the policy stance as 'withdrawal of accommodation' and the first rate cut will occur in Q3FY25. Moreover, the rate-cut cycle could be shallow.
"We believe the stance should continue to be withdrawal of accommodation. Strong evidence of emerging economy central bank rate actions is predicated by advanced economy central bank rate action. India is an exception. The first RBI cut is possible in Q3FY25. Rate cut cycle likely to be shallow," said SBI.
(With agency inputs)