Moneycontrol Poll | Bankers, economists expect MPC to leave repo rate unchanged on Thursday

The liquidity in the banking system remained in a huge deficit in the last few months. To support this, the central bank has conducted various variable rate repo auctions.

The Reserve Bank of India (RBI)-led Monetary Policy Committee (MPC) is likely to leave key interest rates unchanged in this week’s monetary policy review,  according to a poll of economists and bankers by Moneycontrol on February 5.

All eight experts who participated in the survey said that there won’t be any change in policy rates. The MPC is scheduled to meet from February 6 to 8.

Seven of them highlighted that the central bank would maintain the policy stance of withdrawal from accommodation in the meeting, thus largely continuing the policy approach taken in recent months. One person said the stance could be changed to neutral.

“We do not expect a change in stance or policy rate as the RBI is likely to remain cautious on inflation and reiterate its target of 4 percent inflation,” said Sakshi Gupta, Economist, HDFC Bank.

Gaura Sengupta, economist at IDFC First Bank, said that the monetary policy stance is likely to be a close call, but in a base case, Sengupta expects the stance to remain for withdrawal of accommodation.

“A change to neutral would need to be accompanied by stronger liquidity infusion measures, such as a larger quantum of variable rate repo auction,” Sengupta added.

Sixth consecutive policy with no action?

If the MPC maintains status quo on February 8, this will be the sixth consecutive pause in the last one year.

Since the April monetary policy in 2023, the RBI has kept the repo rate unchanged at 6.5 percent, after raising it by 250 basis points (bps) since May 2022. This was after inflation showed signs of moderating. One basis point is one-hundredth of a percentage point. One bps is one hundredth of a percentage point.

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High inflation

In the February monetary policy meeting, the RBI is likely to be more comfortable on the inflation numbers, experts said. But caution is likely to be there. The central bank, in the last few years, is seen battling hard to fight against inflation and it has somehow managed to bring it down to its band of 2-6 percent in the last few months.

Despite this, it remained above the medium-term target of 4 percent. Since inflation is ranging between RBI’s tolerance band, its focus now is to bring it to 4 percent. India's headline retail inflation rate accelerated to a four-month high of 5.69 percent in December, according to data released by the Ministry of Statistics and Programme Implementation on January 12, thanks to an unfavourable base effect.

The Consumer Price Index (CPI) inflation print in November was 5.55 percent. At 5.69 percent, the latest CPI inflation figure is below expectations, with economists predicting that prices likely rose 5.9 percent year on year (YoY) in December 2023.

Sengupta from IDFC First Bank said that the RBI will sound more comfortable on inflation in the meeting, with sustained broad-based moderation in core inflation and growth conditions remaining on the stronger side.

On January 18, RBI Governor Shaktikanta Das, during an interaction with a private television channel, had said: “At this time, the topic of rate cut is not on our table, it’s not even under discussion. Our focus is to remain actively disinflationary, to bring the inflation to 4 percent.”

Das further said that inflation has moderated steadily from the high of 7.8 percent after the Russia-Ukraine war and it has come to the RBI’s target range of 2-6 percent, but the target is 4 percent.

“We are still moving towards 4 percent. Till we reach 4 percent on a durable basis, it will be premature to talk about rate cuts,” the RBI Governor said.

Finance Minister’s take on RBI policy

On February 2, Finance Minister Nirmala Sitharaman said that the RBI will take a call on the course of interest rates, keeping the challenges of economic growth in mind.

These comments came ahead of the monetary policy schedule to be released on February 8.

"I think RBI takes a call keeping growth in mind," the minister said in an exclusive interview to Rahul Joshi, Editor-in-Chief, Network18, a day after presenting the interim budget. Sitharaman said that the RBI has been steady in its policy approach, keeping growth in mind.

“The government would appreciate the RBI to work with stakeholders while charting the course of interest rates. I am sure the RBI takes a call, keeping growth in mind. They have been steady, I suppose. They will continue to be steady is my expectation and hope," Sitharaman said.

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Liquidity

Most experts believe that the central bank will comment on liquidity in the monetary policy and it will be important to watch. This is because, in the last few months, the central bank has been keeping liquidity tight.

“The commentary on liquidity will be important, given the rise in liquidity deficit over the last few weeks,” Gupta from HDFC Bank said.

Experts said that this usually helps the transmission of past rate hikes done by the RBI.

The liquidity in the banking system remained in a huge deficit in the last few months. To support this, the central bank has conducted various variable rate repo auctions.

But that did not help much and still liquidity remained in a huge deficit. At present, liquidity in the banking system is in a deficit of around Rs 2.22 lakh crore.