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The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) which will meet between August 8-10 is widely expected to keep the policy repo rate unchanged for the third consecutive time at 6.5 per cent. While there’re concerns over higher consumer price index (CPI) inflation, driven by an increase in prices of vegetables and pulses, the central bank may continue with its policy stance of ‘withdrawal of accommodation’ amidst surplus liquidity in the banking system.
In the monetary policy announced in April, the MPC unanimously decided to pause the hike in the repo rate — the rate at which RBI lends money to banks to meet their short-term funding needs. This pause was announced after the repo rate was hiked by 250 basis points (bps) since May 2022. One basis point is one-hundredth of a percentage point.
In June policy, the central bank again left the repo rate unchanged at 6.5 per cent.
After announcing the April policy, RBI Governor Shaktikanta Das stated that ‘it was a pause and not a pivot’ – a statement he reiterated post the June policy announcement.
Why will RBI extend the pause in August?
Analysts and economists are of the view that the six-member MPC will leave the repo rate unchanged with hawkish guidance.
State Bank of India Chairman Dinesh Khara said the RBI policy will remain at the same level as far as policy rates are concerned.
“The expectation is that there will be no change in the repo rate as inflation remains a concern. Inflation while being lower than 5 per cent in June is expected to come closer to 6 per cent in July. The prices of vegetables as well as pulses will continue to exert upward pressure on food inflation,” says Bank of Baroda Chief Economist Madan Sabnavis.
Apart from vagaries arising from monsoon and agriculture-related issues, a recent spike in international crude oil prices (11 per cent since June) due to supply cuts from the Organisation of the Petroleum Exporting Countries (OPEC) could also put upward pressure on inflation, Care Ratings said in a report.
The RBI’s move to extend the pause in August policy will come at a time when other major central banks such as the US Federal Reserves and European Central Bank (ECB) have raised interest rates by 25 bps.
Will RBI retain its policy stance?
“We expect the MPC to maintain the “withdrawal of accommodation” stance for now, with system liquidity continuing to be in a surplus mode and given the considerable uncertainty surrounding the near-term inflation outlook,” says Kaushik Das, Chief Economist, India & South Asia, Deutsche Bank.
The surplus liquidity is on account of the return of Rs 2,000 banknotes to the banking system. The RBI had withdrawn Rs 2,000 notes from circulation in May this year. As on July 31, Rs 3.14 lakh crore, or 88 per cent of these notes, have returned to the banking system.
According to a research report by Goldman Sachs, the domestic banking system liquidity is likely to remain adequate with the RBI’s decision to withdraw Rs 2,000 notes, and as the RBI continues to build foreign exchange (FX) reserves on the back of strong equity inflows.
Domestic equities have seen $16 billion in foreign institutional investors (FII) inflows from May to July while the RBI has been leaning against any inflows and have added around $18 billion to FX reserves since May.
“With considerable uncertainty around the commodity prices path and global growth, the RBI is likely to retain the liquidity tightening stance, as signalled by the comment that the MPC will ‘remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth’,” says the Goldman Sachs report.
Will RBI change its inflation forecast?
In the June monetary policy, the RBI revised its FY2024 inflation projection to 5.1 per cent from 5.2 per cent announced in April. It said CPI inflation is expected to be at 4.6 per cent Q1; 5.2 per cent in Q2; 5.4 per cent in Q3; and 5.2 per cent in Q4.
For July, inflation is likely to rise in the range of 6-6.8 per cent from 4.81 per cent in June. Some economists believe that the RBI will revise its FY2024 CPI inflation projection upwards.
Deutsche Bank’s Das feels that the full-year CPI inflation forecast will be revised to 5.2 per cent from the current 5.1 per cent. However, BoB’s Sabnavis says that the FY2024 inflation forecast will remain unchanged but the RBI may revise the Q2 CPI projection. “Even if the Q2 inflation number is changed, it might not be very significant. I don’t think the RBI will do it (change the FY24 inflation forecast) this time. They will probably wait for a few more data points before revising it,” he says.
Will the growth projection be changed?
The RBI has projected real GDP growth for 2023-24 at 6.5 per cent. Most analysts believe that the central bank will maintain a similar growth projection in the policy.
Will there be any change in lending and deposit rates?
In case the RBI maintains the status quo, there will be no change in external benchmark lending rates (EBLR) that are linked to the repo rate, giving relief to borrowers as their equated monthly instalments (EMIs) will not rise. However, borrowers whose loans are linked to MCLR (marginal cost of fund-based lending rate), may see some upward revisions.
Banks have already raised their deposit rates and are unlikely to increase them any further.
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