Interview: No change in repo rate likely in April, says BoB’s Madan Sabnavis

Madan Sabnavis says RBI will not change stance as there may be less reason to believe that earlier rate hikes have been fully transmitted

The Reserve Bank of India's Monetary Policy Committee will keep the repo rate unchanged at 6.50 percent in its meeting on April 5, said Madan Sabnavis, chief economist at Bank of Baroda. The RBI has kept the repo rate unchanged since April 2023.

In an exclusive interview with Moneycontrol, Sabnavis said the RBI will not change its stance as there may be less reason to believe that earlier repo rate hikes have been fully transmitted. He also said the central bank will look at a 25 basis points (bps) cut in August. Edited excerpts:

What will be the MPC's decision on the repo rate on April 5?

There will almost surely be no change in the repo rate...  The reason is that inflation still is at 5.1 percent...  Further, we have seen prices of onions going up. Also, reservoir levels have fallen sharply, which can indicate further stress on the food inflation front in the months to come as everything is dependent on the monsoon arriving on time.

Do you see a change in the RBI's stance at the MPC meeting?

I do not think there will be any change in stance...  there may be less reason to believe that... past repo rate hikes have been fully transmitted. Therefore, changing stance will mean sending different signals to the market. The RBI is anyway targeting the weighted average call rate (WACR) and ensuring there is enough liquidity through variable rate repo (VRR) auctions.

Also read: MPC Poll: RBI to leave key interest rates unchanged at April monetary policy, say economists, bankers

What's your take on the impact of easing inflation?

Inflation per se does not impact the banking sector unless it leads to policy rate changes. Banking business will carry on in the normal way. But inflation trends and the breakup of the same does influence bond yields as markets form conjectures on how the repo rate will move and at what point of time... But this is more of a tertiary effect.

What's your outlook on the current account deficit (CAD)?

CAD will only improve over time, and we can expect it to be around 1 percent next year. Reason is that with global commodity prices generally benign, the import bill will be under control, thus controlling the trade deficit. Service exports will continue to flourish, which will add weight to the current account. This is good for us because when combined with higher capital flows, especially FPI (due to the index effect), we can think of forex reserves increasing by up to $50 billion next year.

How do you see the inflation scenario playing out?

Inflation will move down more due to base effects but remain tight at over 5 percent till June. Subsequently, the base effect will bring it down, but it will all depend on the monsoon. Also, the core part will increase as we have seen several FMCG companies increase their prices, as have the education and health segments. Therefore, inflation will be stable in the 4.5-5 percent range next year.

When do you see a cut in the repo rate by the RBI?

Based on the MPC’s projections on inflation, it will touch 4 percent in Q2 of the next financial year, which is when we can expect a cut. But it will be 25 bps and only in or after August.