Will RBI hold repo rate? 5 things to look out for in MPC

Reserve Bank of India

The Reserve Bank of India's Monetary Policy Committee (MPC) is set to announce its bi-monthly interest rate decision on August 8.

A Moneycontrol poll of 20 economists and bankers showed that the MPC is expected to keep policy repo rate unchanged in the August monetary policy, as headline inflation is still away from the target.

Here are five things to watch out for in the RBI monetary policy on August 8.

The repo rate, at which the central bank lends short-term funds to banks, stands at 6.5 percent. The central bank has kept it unchanged since April 2023.

Will the MPC change the repo rate in this round? Unlikely.

The majority of the economists and bankers who participated in the Moneycontrol poll said the central bank may leave key rates unchanged.

If the central bank keeps repo rate unchanged, it will then be the ninth consecutive time of no rate action.

The RBI's policy stance indicates the thinking within the MPC, the rate-setting panel. Currently, its stance is of withdrawal of accommodation.

An accommodative stance indicates that the tilt is towards a rate cut, while a neutral stance suggests rate action can happen on either side.

In the monetary policy poll of Moneycontrol, 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.

Some economists said the change in monetary policy stance will give a confusing or mixed signal to the market when the top priority of the central bank is to fight against inflation.

Experts expect that the central bank to maintain GDP growth numbers in August monetary policy. However, some economists believe that the real GDP growth may be raised to 7.5 percent.

In June monetary policy, the central bank projected real gross domestic product for the financial year 2024-25 at 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.

Most economists 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 a four-month high of 5.08 percent compared with 4.75 percent in the previous month as food inflation galloped to 9.4 percent given the impact of heatwave on vegetables.

In June monetary policy, the central bank had projected CPI inflation for 2024-25 at 4.5 percent with Q1 at 4.9 percent; Q2 at 3.8 percent; Q3 at 4.6 percent; and Q4 at 4.5 percent.

Money market experts believe that the central bank may continue to drain temporary liquidity from the banking system even though it is in huge surplus.

A fund manager said RBI has multiple tools to remove excess liquidity from the banking system given the stance remains “Withdrawal of accommodation”. However, looking at the CD ratio and bankers scouting for deposits, a permanent drain on liquidity seems unlikely and RBI may continue to drain temporary liquidity.

Currently, liquidity in the banking system is estimated to be in surplus of around Rs 2.79 lakh crore.