Status quo on repo rate hike more likely

Mumbai The Monetary Policy Committee of Reserve Bank of India (RBI), which concludes its three-day policy review meet on Thursday, is likely to keep key interest rates unchanged, according to experts and stakeholders Bizz Buzz has interacted with.

Madhavi Arora, chief economist, Emkay Global, says that the upcoming MPC policy is unlikely to differ much from that in April, hinging its reaction function to a fluid global situation and domestic growth-inflation backdrop, and retaining policy flexibility.

The policy tone will likely be balanced yet non-committal, with no change in the stance, thus adding to its inflation-fighting credibility. Additionally, more financial stability risks may unfold with the unprecedented pace of tightening in global policy rates. It is unlikely that the RBI will precede the Fed in reversing its course of rate hikes, she said.

According to her, MPC may soften its tone amid improving domestic inflation outlook (and a possible downward revision in its forecast), improving external sector dynamics and ongoing monetary-policy lags of past hikes.

Pankaj Pathak, Fund Manager (Fixed Income), Quantum AMC, said: “We expect the RBI to maintain a status quo on rates. The last rate hike was in February. The RBI will remain on an extended pause on policy rates in foreseeable future. The key thing to watch in the upcoming monetary policy would be RBI’s policy stance. Till the last year, the monetary policy was ultra-accommodative with the policy repo rate significantly below their normal levels and banking system flooded with liquidity.”

At present, the repo rate at 6.5 per cent is very close to its long-term average. Liquidity is still in surplus, but it has come down to a level which can be taken as close to normal and as non-inflationary. So, there is a strong case for the RBI to retire the phrase withdrawal of accommodation, he said.

According to Pathak, “I think, RBI’s decision on stance will be more dependent on managing market’s perception than inflation and liquidity outlook. The fear is that the change in stance could be taken as a declaration of victory over inflation and could hamper the transmission of earlier tightening, which is required to keep inflation under check. At this juncture, the RBI can’t be seen as getting complacent on inflation.”

Currently, the bond market is positioned with some expectation of stance change from ‘withdrawal of accommodation’ to ‘neutral’. However, this policy decision should not have any material impact on the bond market though there could be minor fluctuation in yields depending on policy stance and language.

Churchil Bhatt, executive vice-president & debt fund manager, Kotak Mahindra Life Insurance Company Ltd, said: “The market doesn’t seem to be anticipating an immediate rate cut. The best case for the June policy would be a softer ‘stance’ by the MPC. The current policy stance of ‘withdrawal of accommodation’ has already run its course, with pandemic-era policy accommodation behind us.”

It’s only a matter of time before the MPC moves to a ‘neutral’ stance. In the absence of a major global risk event, we may be in for a prolonged policy pause. In June, MPC is likely to maintain a status quo on rates. Everyone will be closely following the speech of the RBI governor, he explained.

Softening Tone

• Last rate hike was in Feb
• RBI cumulatively hiked repo rate by 250bps since May 2022 to 6.5%
• The move was in a bid to contain inflation
• RBI unlikely to differ from April, when it paused on rate hike
• Positive macro data supports experts’ forecast
• Improving domestic inflation outlook
• Favourable external sector dynamics

Now, the repo rate at 6.5% is very close to its long-term average. Liquidity is still in surplus, but it has come down to a level, which can be taken as close to normal and as non-inflationary

- Pankaj Pathak,

Fund Manager (Fixed Income), Quantum AMC