
Ahead of the October monetary policy review meeting, experts have said that the Reserve Bank of India might maintain a status quo on policy rates for the fourth time in a row on the back of high retail inflation. The central bank had last raised the benchmark repo rate to 6.5 per cent on February 8, 2023. Following that, it has maintained the rates at the same level overseeing high retail inflation and certain global factors including elevated crude oil prices in the international market.
The Reserve Bank Governor-headed six-member Monetary Policy Committee (MPC) meeting is scheduled for October 4-6, 2023. The last meeting of the MPC was held in August.
Repo rates since 2022
10-08-2023 6.50%
08-06-2023 6.50%
06-04-2023 6.50%
08-02-2023 6.50%
07-12-2022 6.25%
30-09-2022 5.90%
05-08-2022 5.40%
08-06-2022 4.90%
04-05-2022 4.40%
08-04-2022 4.00%
10-02-2022 4.00%
In August, India’s retail inflation eased to 6.83 per cent from 7.44 per cent in July after vegetable prices cooled somewhat compared to the previous month, the National Statistical Office (NSO) data showed.
At 6.83 per cent, the Consumer Price Index (CPI) inflation print for August is 61 basis points lower than July's 15-month high of 7.44 per cent. But it is still higher than the tolerance band of the RBI.
This is the fourth instance when the retail inflation rate or the CPI has breached the RBI's upper limit of 2-6 per cent in 2023 and the seventh instance since July 2022. The RBI mainly factors in retail inflation while deciding the benchmark interest rate (repo rate). The central bank has projected the CPI inflation at 5.4 per cent for 2023-24.
Madan Sabnavis, Chief Economist, Bank of Baroda, said: "We do expect the RBI to hold on to a status quo position this time as inflation is still high and liquidity tight. In fact, going by RBI forecast on inflation, it would be above 5 per cent in Q3 too, which will ensure that the status quo prevails for the calendar year for sure and probably Q4 too."
Sabnavis further said there are uncertainties relating to Kharif crop, especially on pulses, which can increase prices.
"The comfort is that there is less concern on growth which is on target," he added.
Aditi Nayar, Chief Economist, ICRA Limited said the headline CPI inflation is expected to ease to 5.3-5.5 per cent in September 2023 from 6.8 per cent in August 2023, benefitting from the halving of the average price of tomatoes as well as a favourable base.
"... We expect the CPI inflation to ease to 5.6 per cent in Q3 FY2024 and further to 5.1 per cent in Q4 FY2024, amid upside risks to food inflation on account of the impact of uneven and sub-par monsoons and low reservoir levels on Kharif yields and Rabi sowing, respectively," she said.
Nayar said ICRA expects the MPC to remain on hold in October 2023 policy, while continuing to demonstrate caution amid a cloudy outlook for food inflation and elevated crude oil prices.
Sanjay Bhutani, Director, Medical Technology Association of India (MTaI) said the RBI has gone along with the market sentiment of retaining the benchmark interest rate at 6.5 per cent for quite some time now.
"...if that is not possible in view of high retail inflation and the hawkish stance of the Federal Reserve, the medical technology sector, which is reeling under the burden of high debt, does expect the RBI to continue with the pause and at the same time provide some firm indication of easing rates in the near future," Bhutani opined.
Sandeep Bagla, CEO, Trust Mutual Fund, said the environment for interest rates has worsened considerably from MPC's last policy review in August. In the US and in India, the economy has shown resilient growth, and inflation numbers have risen beyond comfort levels.
"While food prices have softened, crude oil prices have climbed up, thereby raising inflationary expectations as evidenced by sharp rise in US treasury yields. The MPC will consider all these factors and maintain status quo on repo rates, as headline inflation is expected to come down in the coming months," he said.