RBI may maintain status quo on rates in June as CPI inflation falls below 6%, say economists

Vivek Kumar, an economist at QuantEco Research said as average inflation moderates towards 5.3 percent in FY24 from 6.7 percent in FY23, the pause on monetary policy could get prolonged with scope for stance to turn neutral when there is more clarity on monsoon prospects.

“The pause is here to stay for at least 2-3 quarters before we get a pivot in the form of a cut,” said Madhavi Arora, lead economist, Emkay Global Financial Services.

In April Monetary policy, the RBI surprised markets by leaving the repo rate unchanged at 6.5 percent against expectations of a hike of 25 basis points. Adding to this they said it stood ready to act should the need arise.

The central bank expects inflation to moderate to 5.2 percent in 2023-24.

The MPC is scheduled to next meet during June 6-8.

Risk on inflation numbers

However, some economists said any unevenness in the monsoon rains could affect food prices and an uptick in crude oil prices may impact the inflation trajectory.

Adding to this, the impact of unseasonal rains in March on Rabi crops may also pose an upside risk to inflation going forward.

“Any subsequent deficiency in monsoon rainfall could affect yields and food inflation, which along with any further hardening in crude oil prices remains a risk for the inflation trajectory,” said Aditi Nayar, Chief Economist and Head Research and Outreach ICRA.

“The impact of unseasonal rains in March on Rabi crops, especially wheat could pose an upside risk to the food inflation. The risk will get compounded if the monsoon turns unfavourable,” said Rajani Sinha, chief economist, CareEdge.

Also read: Expected normal monsoon may help RBI in inflation battle, say experts

IMD forecast favourable for inflation

Further, economists said the recent projections by the Indian Metrological Department (IMD) on monsoon will also help inflation to stay below the upper tolerance band of the RBI along with a high base effect.

The IMD on April 11 said the country can expect regular rainfall during the southwest monsoon season as a positive Indian Ocean Dipole (IOD) and lower snow cover over the northern hemisphere are likely to counter the developing El Nino conditions.

“The recent projection by IMD of a normal monsoon bodes well for the inflation trajectory. However, the impact of heat waves and any disruption in the progress of monsoon due to El Nino could upset the disinflation trend and remains a risk,” said Sakshi Gupta, Principal Economist, HDFC Bank.

Some economists said that by the time the monetary policy committee meet for the next policy, the monsoon rains will be underway, which will give more clarity to the RBI.

“The monsoon rains would be underway, giving a little more clarity into the likely outcome for the H1 of the monsoon season. This information would influence whether the MPC’s CPI inflation projection of 5.2 percent for FY2024 needs to be modified,” Nayar said.

Also read: IIP growth edges up to 5.6% in February

Impact on bond yields

Economists said the easing inflation numbers will help bond yields to cool off by 5-10 basis points (Bps) as it gives bond traders comfort that the central bank will refrain from hiking rates further in the upcoming policy.

They expect bond yields to trade in the 7.10-7.35 percent in the coming days due to lower inflation numbers and good demand from investors in the market.

“Bond yield could inch below 7.2 percent tomorrow, especially if the US CPI print also shows a downward trend,” Gupta said.

On April 12, the 10-year benchmark 7.26 percent 2032 bond yield closed at 7.2134 percent, as against 7.2224 percent ended in the previous trading session.