RBI may opt for interest rate pause for the fifth consecutive time, say experts

RBI Governor Shaktikanta Das. (File photo)

The Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC) is likely to opt for another rate pause on December 8, industry experts said. After opting for a pause for four times, this would be the fifth consecutive policy where the Central Bank maintains the status quo in key interest rates.

The RBI has kept the repo rate unchanged at 6.5 percent since February 2023, when the rate was raised from 6.25 percent to 6.5 percent. The RBI has raised the repo rate by 250 basis points (bps) since May 2022.

Industry experts said that the RBI will opt for a pause and highlighted that the Central Bank’s recent move to raise risk weights on consumer credit indicate that it is not going to lower rates soon.

“We are expecting the repo rate to be status quo in the upcoming policy,” said Dinesh Khara, Chairman, State Bank of India (SBI).

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Umesh Revankar, Executive Vice Chairman, Shriram Finance, said: “There was a decline in inflation to 4.7 percent in October 2023. This has kindled hopes of a return to the declining rates regime. However, recently, the RBI raised risk weights on consumer credit, credit card receivables, and NBFC exposure to control the liquidity in the system. It clearly indicates that the MPC will maintain the repo rate at 6.5 percent.”

The MPC is scheduled to meet next from December 6-8.

India’s headline retail inflation rate eased to a five-month low in October 2023, broadly in line with market expectations. Inflation as measured by the Consumer Price Index (CPI) eased to 4.87 percent in October 2023 from 5.02 percent in September 2023. Although headline inflation stayed within the RBI’s tolerance range of 2-6 percent for the second month in a row, it has been above the medium-term target of four percent for 49 consecutive months.

Also Read: India's retail inflation falls again in October, hits 5-month low of 4.87%

The easing of inflation was attributed to the combination of a favourable base effect and cooling prices of some items, although rising onion prices kept the fall in inflation in check.

Among food items, vegetable prices rose 3.4 percent month-on-month primarily due to a 15 percent sequential increase in onion prices. Potato and tomato prices were more supportive of disinflationary developments. While potato prices were unchanged in October from September, those of tomatoes fell 19 percent month-on-month.

The Central Bank’s approach to cut key interest rates is unlikely to happen in the next six months, experts said.

Speaking to Moneycontrol, Khara said that a cut in repo rate is not expected in the next six months. While Revankar highlighted that the inflation numbers over the last few quarters have been encouraging the economy is still not out of the woods.

“We anticipate no rate cuts till the beginning of the next fiscal year,” Revankar said.