RBI’s MPC may opt for a rate pause again, keep tight liquidity, say experts

The Reserve Bank of India's MPC is scheduled to meet next from October 4-6.

The Reserve Bank of India (RBI)-led Monetary Policy Committee (MPC) is likely to opt for another rate pause on October 6, experts said.

This would be the fourth consecutive policy where the RBI maintains 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 central bank has raised the repo rate by 250 basis points (bps) since May 2022.

Experts highlighted that RBI will opt for a pause but will be cautious about the kharif crop, particularly pulses, which may put more upward pressure on prices.  The RBI will continue to exert control over money circulation, they said.

"Since the latest MPC, the monsoons have been actively narrowing the deficit gap of long-term average of overall rains which present concerns about the Kharif crop. But we expect the RBI to keep the repo rate rise on hold for some more time," said Umesh Revankar, Executive Vice Chairman, Shriram Finance.

Shyam Srinivasan, Managing Director and Chief Executive Officer (MD and CEO), Federal Bank, in an interview with Moneycontrol said the RBI is likely to maintain status quo on the repo rate for the fourth time in a row at its bi-monthly monetary policy review meeting early next month.

"Signals indicate we may not see a rate change in the October policy meeting and there will be status quo," said Srinivasan on September 27.

The MPC is scheduled to meet next from October 4-6.

Inflation rate

India's headline retail inflation rate for August 2023 was at 6.83 percent as vegetable prices cooled somewhat compared to the previous month.

Here, markets and the regulator were prepared for an increase in inflation, with the central bank on August 10 raising its CPI inflation forecast for July-September by 100 basis points to 6.2 percent even as its Monetary Policy Committee (MPC) left the policy repo rate unchanged at 6.5 percent for the third meeting in a row.

In July, the headline retail inflation rate crashed past the upper bound of the RBI two to six  percent tolerance range and shot up to a 15-month high of 7.44 percent, spurred on by a massive increase in vegetable prices.

Radhika Rao, Executive Director and Senior Economist, DBS Group Research, said that the central bank will maintain a hawkish pause as the inflation is still above its target.

"With inflation still above the target, the RBI MPC is on course to maintain a hawkish pause in October, besides keeping liquidity tight. While the squeeze might be addressed through ad-hoc market operations, we expect the balance to stay in a deficit or neutral, in sync with the central bank’s anti-inflationary stance," said Rao.

Sonal Badhan, Economist, Bank of Baroda said: “Vegetable prices and core inflation has begun to shorten. Additionally, key upside risks persist owing to weak monsoon, pressure on sowing and recent build up in oil prices. Here, we expect RBI to revise its inflation forecast from 5.4 percent for FY24 to 5.5 percent."

While domestic inflation risks have moderated somewhat, risk from global commodity prices remains in place, according to Sakshi Gupta, Principal Economist, HDFC Bank.