RBI sticks to status quo on key rates

MPC remains vigilant to upside risks from inflation, especially food inflation. The path of disinflation is interrupted by volatile and elevated food inflation.Aided by a healthy forecast monsoon, which has almost arrived, we think inflation will continue to fall to 4% target by July -- Dr Shaktikanta Das, RBI Governor

Mumbai: As widely expected, the Reserve Bank of India (RBI) kept repo rate unchanged at 6.5 per cent on the conclusion of its three-day MPC meeting here onFriday. However, experts are of the view that RBI may go for ratecut by 25 basis points when the Monetary Policy Committee (MPC) meets for the next bi-monthly policy review in August. This can be gauged from the fact that out of the six MPC members, the two voted for a rate cut this time.

With inflation likely to continue falling over the coming months, analysts maintain their long-held view that easing cycle will commence in August.

Meanwhile, RBI Governor Dr Shaktikanta Das said: “MPC remains vigilant to upside risks from inflation, especially food inflation.”

He further said that MPC voted 4:2 to continue its hawkish stance of withdrawal of accommodation. It has to be noted that this stance has been maintained since April 2022. World has gone into one crisis after another and it still continues, he said.

Sources familiar with the development told Bizz Buzz that MPC member Jayanth Varma once again voted for a 25-bps-cut in repo rate and he was supported by another MPC member Dr Ashima Goyal. However, their detailed views will be out when RBI makes the minutes of the meeting public within a couple of weeks from now. With the economy performing well,RBi is likely to remain a inflation warrior.

The RBI Governor stated that the path of disinflation is interrupted by volatile and elevated food inflation. However, headline inflation is easing, driven by softening in its core component, he added.

Capital Economics in a note said that aided by a healthy forecast monsoon, which has almost arrived, we think inflation will continue to ease over the coming months and could even fall to the 4 per cent target by July from 4.8 per cent at present.

Overall, we are still comfortable with our forecast that the RBI will cut rates in August and are pencilling in a 25-bps reduction in the repo rate to 6.25 per cent for that meeting. By contrast, the consensus is not expecting any more until Q4, it added. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank, said, “We see room for stance change in the August policy with a plausible easing from October meeting”.

The split in voting patterns clearly shows the increasing probability towards a pivot in the policies ahead. However, we believe the robust growth will give enough opportunity for the MPC to remain on a wait and watch mode until better clarity comes from monsoons and quality of expenditure from the Budge, she said.

However, there is another school of experts who believe that the rate cut may happen in October only.

Madan Sabnavis, Chief Economist, Bank of Baroda, says: “Our view is that October can be the time when a rate cut can be considered but will be fully data-driven.” The RBI has pointed out that while inflation will go below the four per cent mark in Q2, it would be rising again in Q3 and Q4, he said, adding that that there will be continuous monitoring of the monsoon and food inflation from now on to gauge the durability of lower inflation before taking a call.