The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has begun its latest policy meeting on Tuesday to deliberate on the rate trajectory. The MPC meeting comes at a critical juncture as the committee grapples with two significant factors that could influence their decision-making process.
Firstly, India has been experiencing a substantial surge in the prices of essential commodities such as cereals, vegetables and pulses. This inflationary trend is primarily attributed to erratic monsoon patterns and subsequent flooding in certain country regions. The inflation rate has been further exacerbated by cereal shortages, which are expected to increase inflation. These factors have led to an increase in the Consumer Price Index (CPI), a key indicator of inflation, thereby limiting RBI’s ability to lower interest rates.
Secondly, the MPC must also consider the recent decision by the US Federal Reserve to resume raising interest rates after a pause. This move marks the 11th rate increase since the Fed began its inflation fight in March 2022, bringing the lending rate to a range of 5.25-5.5%. The Federal Reserve's decision could impact global monetary policy changes and influence RBI's stance on interest rates.
Adhil Shetty, CEO of BankBazaar.com, said, “Despite the spike in food price inflation, one hopes that headline inflation remains within RBI’s tolerance band. Interest rates have risen precipitously over the last 15 months, so a pause was most welcome. Further hikes would strain the common man when everyone’s looking forward to a lowering of the repo rate in the near future. It would be interesting to see if the food price spike will force the RBI to raise interest rates, but one hopes it doesn’t have to come to that. A continued pause in rate hikes will be preferable because persistent high inflation has been challenging.”
“Another hike would add several more years—or decades for new borrowers—to outstanding home loans. Borrowers are advised to continue with repayment strategies such as prepaying 5% of their loan balance each year or refinancing to a lower rate to reduce their debt burden. On the other hand, fixed deposits are still trending at higher rates. This is a good time for investors to lock-in their money for higher returns. They can also further explore laddering their FDs to maximise their returns,” added Shetty.
Besides, Deepak Agrawal, CIO- Fixed Income, Kotak Mahindra Asset Management Company, says, “The Q2FY24 (July-Sep) inflation is likely to be a little over 6% as against RBI forecast of 5.2%. This is due to a sharp spike in vegetable prices, particularly tomatoes. We don’t expect any spill-overs from food inflation to core inflation, as the rise in prices is expected to be temporary. Core CPI inflation is expected to remain steady at 5.1% for the rest of FY2024. This should be a source of comfort for the RBI and we expect RBI to keep rates unchanged and continue with ‘withdrawal of accommodation’ monetary policy stance.”
Palka Arora Chopra, Director, Master Capital Services says, "In the forthcoming monetary policy meeting, RBI is likely to retain interest rates at the current level for the third consecutive time. This is due to the recent decline in the inflation rate, which has fallen below 5%. However, it is anticipated that RBI might employ preventive measures in the next meeting, but there is no fundamental reason to consider a repo rate hike."
Floods in the northwest and insufficient precipitation in the south and east have slowed harvesting. The market for cereals is actually on the rise, both domestically and internationally
Mahesh Agarwal National Head Wealth at AUM Capital, said, "We expect the RBI to maintain a cautious and hawkish stance in its upcoming monetary policy meeting. The rise in inflation is also causing a rise in food prices, specifically in the price of vegetables in July."
According to Consumer Price Index (CPI), India’s retail inflation skyrocketed to a three-month high of 4.81% in June. Even though it presently remains within RBI’s acceptable range i.e., below 6% but its impact can be seen on the prices of vegetables and pulses which have surged sharply. Consequently, the upside risks in inflation will remain intact in the near future and it wouldn’t be wrong to expect a surge in inflation over the next two months.
"Also, incessant and uneven rainfall in a few regions may impact the supply chain negatively. But, it will not be a major concern in the text for two quarters, which is a relief. RBI’s decision to lower the interest rate depends mainly on the inflation and Fed’s interest rates. If growth falls below 5.5% and the Fed lowers its interest rates, then only we can expect RBI to reduce the repo rate. Also, liquidity has been improved after the withdrawal of Rs 2000 notes. Thus we anticipate RBI will retain the current stance on withdrawing accommodation. RBI's attitude will remain cautious and will take further cues from Increase in Fed rates," said Chopra.