According to an ET Poll of 15 respondents, at the end of its August 8-10 meeting, the RBI’s Monetary Policy Committee is seen keeping the repo rate unchanged at 6.50% and maintaining its prevailing stance of withdrawal of accommodation.
The MPC has raised the repo rate by a total of 250 basis points from May 2022 to February 2023 to tackle elevated inflation.
While Consumer Price Index inflation registered sharp declines in March, April and May, the price gauge started to reverse direction in June, with hardening vegetable prices, particularly of tomatoes, playing spoilsport.
The trend is expected to continue in July, with several economists predicting CPI inflation at 6.0-6.5% as against 4.81% in June. The MPC’s tolerance band for CPI inflation is 2-6%.
“The MPC’s tone is likely to have a strong focus on inflation management, given the likelihood of two successive (inflation) prints above 6%. In terms of forecast changes it is better to wait for the September or October policy because they will have more clarity on the monsoon,” said Anubhuti Sahay, Standard Chartered Bank’s Head of South Asia Economic Research. The MPC, which has forecast CPI inflation at 5.1% in FY24, sees the gauge at 5.2% in the on-going quarter.INFLATION VIEW
A key aspect that is awaited from the monetary policy statement is the rate-setting panel’s estimate for inflation in the first quarter of the next financial year. In the April Monetary Policy Report, the RBI had forecast average inflation for FY25 at 4.5%.
If the central bank keeps its inflation forecast for the first quarter of the next fiscal year below 5%, markets would likely factor in a long pause on interest rates, even as central banks in some advanced economies continue to tighten policy, economists said. What supports this view is the fact that core inflation, which strips out the volatile components of food and fuel, did not surge in June and remained well below the 5.5% mark.
“Inflation is expected to head towards the 6% mark because of vegetables and pulses prices going up. We expect this to be temporary in nature and therefore there is no case of increasing rates. The fact that other central banks have been increasing rates may not be a primary factor but could be another justification for not changing the repo rate,” Madan Sabnavis, chief economist, Bank of Baroda, said.
“The timing of the pivot from a pause to easing will be driven by domestic considerations, particularly signs of weakness in incoming activity indicators while inflation is near the mid-point of the target range,” said Radhika Rao, senior economist at DBS Bank.