RBI may keep key rates unchanged this time too

Mumbai Analysts expect a status quo decision by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on conclusion of its three-day policy review meet on Thursday (August 10). The meeting started on Tuesday.

In contrast to the aggressive stance taken by the US Federal Reserve and Bank of England (BoE), RBI is expected to keep its benchmark repo rate unchanged for the third consecutive time during its upcoming bi-monthly policy.

Madan Sabnavis, chief economist, Bank of Baroda, says: “We do expect a status quo decision by the MPC this time. Inflation while being lower than five per cent in June is expected to come closer to six per cent in July. The prices of vegetables as well as pulses will continue to exert upward pressure on food inflation. With GDP growth in the first quarter expected to be closer to eight per cent thus indicating stability, there is no compelling reason to spur growth presently.”

Repo rate will remain unchanged till end of calendar year. Besides, Fed has indicated possible hike in future and treasury yields have moved up. Further, with liquidity in comfortable position, the stance of withdrawal of accommodation will remain. We expect no change in inflation and GDP forecasts, he said.

MPC will be concerned about the high vegetable inflation prevailing now. But since this is due to seasonal factors, monetary policy can’t do anything about it.

Dr VK Vijayakumar, chief investment strategist at Geojit Financial Services, says: “More importantly, there is strong growth momentum in the economy now and the MPC is unlikely to do anything that upsets the growth apple cart. So, the rates and stance are likely to remain unchanged.”

Investors should be focused on the growth and earnings prospects of different sectors and companies within sectors. Banking, capital goods and autos are on strong wicket, experts say. Rajesh Sharma, Managing Director, Capri Global Capital, says: “The present inflation rate in India is reported to be running at less than five per cent, which has provided some room for the central bank to maintain a steady monetary policy.”

However, there are concerns about potential upside risks to this inflation number in the forthcoming months, primarily due to the substantial increase in prices of vegetables and pulses, which should prompt the MPC to maintain status quo on rates, he said.

Since the last RBI policy, inflationary pressures have increased. Sharp jumps in vegetable prices have pushed expected inflation for the next two to three months above six per cent. Cereal and pulse prices have also moved up. On this backdrop, the RBI should turn extra cautious at the upcoming MPC meeting.

Pankaj Pathak, fund manager (fixed income), Quantum AMC, says: “We expect the RBI to remain on hold and maintain its policy stance as a withdrawal of accommodation. They might raise their CPI inflation forecast for FY24 by 20-30 basis points to around 5.3–5.4 per cent.”

We expect that the RBI will look through the recent jump in food inflation and take comfort from the falling core CPI. Given the healthy rainfall and strong sowing trend, food prices should also cool off in a few months, he added.

A Hawkish pause is widely expected and is already a part of the market psyche. The bond market will take cues from the RBI’s assessment of the current spike in food prices and its impact on the overall inflation outlook and monetary policy.

Therefore, the central bank is likely to continue with the repo rate unchanged and continue with its current stance of ‘withdrawal of accommodation.’ Overall, MPC is expected to adopt a hawkish stance.