The monetary policy committee (MPC) of the Reserve Bank of India (RBI) is expected to keep policy repo rate unchanged in the August monetary policy as headline inflation is still away from the target, according to the Moneycontrol’s poll of 18 economists, bankers and fund managers.
A majority of experts said that the central bank will maintain its ‘Withdrawal of Accommodation’ stance. However, four bankers expect the central bank to change stance to neutral.
Meeting of the MPC will be held between August 6 and August 8. The decision of the MPC will be delivered on August 8.
“We expect RBI’s MPC to maintain status quo in the August policy amid recent high prints on CPI led by volatile food inflation,” said Garima Kapoor, EVP Economist at Elara Capital.
Adding to this, Gaura Sen Gupta, Economist at IDFC First Bank said tone of the policy will be cautious on food inflation risks. “Food inflation pressures remain elevated due to adverse weather patterns – heatwave conditions during the summer months and slow start to the monsoon in June.”
In June monetary policy, the central bank has kept repo rate unchanged citing risk on the inflation front. Inflation has been easing but not to the central bank's desired levels yet.
Earlier, the MPC had steadily raised the repo rate by 250 basis points (bps) starting from May 2022. One basis point is one-hundredth of a percentage point.
In a recent interview with CNBC TV18 on July 11, the RBI Governor Shaktikanta Das said there is no reason for change in stance. Target is 4 percent and we are nowhere near the target, we are still around 5 percent, the expectation is that it will moderate and indeed it is moderating. But the pace of moderation is very slow. If we want faster alignment of inflation to the target, the monetary policy should be much tighter.
Inflation projections
Most economist and bankers said that the RBI may not change the inflation projection in the upcoming policy, but remain cautious on the upside risk due to food inflation.
In June, India’s headline retail inflation rose to four-month high of 5.08 percent in June compared with 4.75 percent in the previous month as food inflation galloped to 9.4 percent given the impact of heatwave on vegetables.
Inflation had dipped to a 12-month low of 4.75 percent in the previous month, despite food inflation hovering around 8.7 percent.
June marks the eighth consecutive month of over 8 percent food inflation, data released on July 12 showed. Within food, vegetables and pulses inflation continued to remain in double digits with 29.3 percent and 16.1 percent rise compared with 27.4 percent and 17.1 percent, respectively.
Potato inflation was a high 57.6 percent in June, onion inflation was 58.5 percent and tomato inflation at 26.4 percent. Pulses inflation has remained in double digits for 13 consecutive months, whereas vegetables inflation has witnessed a double digit increase for the eighth consecutive month.
In June monetary policy, the central bank has projected CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent.
“So far, kharif sowing is broadly progressing well, but rains in August will have an important bearing on production. Any extreme weather events will also be a monitorable,” said Dipti Deshpande, Principal Economist at CRISIL.
GDP Numbers
Experts expect that the central bank to maintain GDP growth numbers in August monetary policy.
“RBI is likely to retain its FY25 GDP growth projection at 7.2%. We remain more conservative on growth assessment with urban consumption expected to slow with moderation in urban wage growth,” Sen Gupta from IDFC First Bank said.
However, some economist believe that the real GDP growth to be raised to 7.5 percent. “Real GDP growth projections for FY25 is likely to be raised to 7.5 percent,” said Madhavankutty G. Group Chief Economist - Manappuram Finance.
In June monetary policy, the central bank projected real gross domestic product for the financial year 2024-25 to 7.2 percent, from 7 percent estimated previously.
RBI Governor while speaking at the Bombay Chamber of Commerce and Industry said that he is confident that India’s growth will touch 7.2 percent in the current financial year.
He also said that if the growth projection stands true for the current year, it will be the 4th straight year of growth above 7 percent.
Global interest rates
On July 31, the US Federal Reserve held short-term interest rates steady but indicated that inflation is getting closer to its target, which could open the door for future interest rate cut. Chair Jerome Powell indicated that while no decision has been made about actions at future meetings, a cut could come as soon as September if the economic data showed inflation easing.
The Bank of Japan (BOJ) raised its benchmark interest rate and unveiled plans to halve bond purchases, underscoring its determination to normalize monetary policy. The BOJ hiked its policy rate to around 0.25 percent from a range of 0 to 0.1 percent.
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