MPC Policy Preview: Five reasons why surprises are unlikely on repo rate, stance

First, retail inflation has been easing gradually. At 5.09 percent in February, inflation stayed largely unchanged from 5.10 percent in the month before. More importantly, core inflation has eased to 3.3 percent. Core inflation refers to the non-food, non-oil part of inflation, which is a key measure of price trends used for policy formulation. The overall inflation print is, however, yet to align with the central bank’s 4 percent target. A rate reversal looks unlikely until then.

Second, the MPC is keeping a hawk eye on global interest rates, especially the way the US Fed is handling the matter, for cues on rate reversals. Last week, the US central bank left the key rates unchanged while repeating caution on inflation. Pointing out that inflation was still hot in the US, Fed Chairman Jerome Powell said the overall story had not changed. "Inflation moving down gradually, sometimes on a bumpy road, towards 2 percent," he said. It is unlikely for the Indian central bank to precede the Federal Reserve in rate reversal, according to economists at Emkay Global.

Third, food inflation typically trends upwards in March due to seasonal factors. In the February round, prices of vegetables were largely steady, with their index down a marginal 0.1 percent from January. On the whole, the Consumer Food Price Index rose 0.1 percent month-on-month, with food inflation, which measures the year-on-year change in the price index, rising to 8.66 percent from 8.30 percent. Economists expect that the RBI will remain cautious on the volatile food inflation trajectory and hence prefer to remain in pause mode on rates until the August policy.

Fourth, the central bank has, time and again, reminded banks about the lack of monetary policy transmission in the banking system. The MPC has hiked the key rates by 250 basis points to 6.5 percent to control inflation. However, the transmission in rates to end-borrowers has not happened to that extent. The RBI would want to see the impact of the earlier rate cuts transmit in the banking system.

Fifth, the growth scenario is improving, giving room for the MPC to hold the interest rates. India’s economic growth continued to be robust in the third quarter backed by strong momentum, robust indirect taxes, and lower subsidies, according to the Reserve Bank of India’s (RBI) monthly State of the Economy article, released on March 19. In the fourth quarter, the economy grew by an impressive 8.4 percent.

On the inflation front, the RBI is likely to tweak the FY 24 forecast, drawing comfort from the easing fuel prices. In the last policy review, the RBI had a forecast of 5.4 percent for FY24. On the growth number, too, the RBI is likely to sound optimistic. The RBI governor recently said that India's GDP growth in the current fiscal year ending in March could be "very close" to 8 percent.

The RBI-led policy panel is likely to continue with the caution on inflation and deliver a repeat of the last monetary policy, possibly with some hints of future rate cuts later this year with a condition that inflation falls comfortably to the 4 percent target mark.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.