RBI MPC may maintain the status quo on August 10; comment on inflation, growth trajectory to be in focus

When the members of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) will begin its huddle on August 8 to decide on India's monetary policy for the coming months, they will have to consider two crucial factors: the recent significant increase in prices of vegetables, cereals, and pulses in the country and the US Federal Reserve's decision to resume raising interest rates after a pause.

RBI, like many of its global counterparts, has been struggling to bring inflation down. Experts point out that the fresh surge in inflation is likely to limit RBI's ability to lower interest rates during this year.

Morgan Stanley expects India's retail inflation to leap to 6.2 per cent at the end of the quarter ended September, against its previous forecast of 5.5 per cent, due to higher food inflation. The Consumer Price Index (CPI) based inflation is, however, expected to moderate to a 5-6 per cent range during the second half of FY24.

However, a broad expectation is that the central bank will maintain a status quo on rates and stance on August 10 as its focus is on core inflation which considers the change in goods and services prices and excludes volatile food and fuel prices.

According to a Mint survey of 10 economists, RBI MPC is likely to leave interest rates and policy stance unchanged at its meeting this week. All economists expect MPC to keep the repo rate unchanged at 6.5 per cent and retain the stance of withdrawal of accommodation.

All eyes will be on what the RBI thinks about India's inflation and growth trajectory. Recently Fitch Ratings downgraded the US credit ratings to 'AA+' from 'AAA' with a 'stable' outlook while Morgan Stanley upgraded India to 'overweight'.

Status quo in August

RBI MPC is expected to maintain a status quo on policy rates and stance despite a sharp spike in vegetable and pulse prices and a divergent global monetary policy cycle.

Read more: Can RBI go the Fed-way next week? A guide on investing in a high-interest rate regime

Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC expects the RBI to stay on hold and maintain its policy stance.

"We expect the RBI to remain on hold and maintain its policy stance as a withdrawal of accommodation. They might raise their CPI inflation forecast for FY24 by 20–30 basis points to around 5.3–5.4 per cent," said Pathak.

"A hawkish pause is widely expected and is already a part of the market psyche. The bond market will take cues from the RBI’s assessment of the current spike in food prices and its impact on the overall inflation outlook and monetary policy. We expect that the RBI will look through the recent jump in food inflation and take comfort from the falling core CPI. Given the healthy rainfall and strong sowing trend, food prices should also cool off in a few months," said Pathak.

Economists at the State Bank of India (SBI) also expect the RBI to maintain the pause mode in the August policy but the chances for a change in stance are minimal.

CARE Ratings, too, believes MPC members will follow a "wait-and-watch approach to better understand the nature of inflationary pressures before announcing a change in policy rate and stance."

"As seasonal inflationary pressures gather momentum, the Reserve Bank of India is expected to prolong the pause, thereby maintaining a status quo in both policy rates and stance. RBI’s MPC is expected to remain cautious given the lingering inflationary concerns," said the rating agency.

Umesh Mohanan, Executive Director & CEO at Indel Money highlighted that the RBI takes into account CPI data to assess the domestic inflation dynamics and CPI inflation is on the higher side and is showing a tendency to move out of the comfort zone of the RBI.

Therefore, Mohanan believes the central bank is likely to continue with the repo rate unchanged and continue with its current stance of 'withdrawal of accommodation.’

Aditya Damani, Founder & CEO of Credit Fair also believes the RBI may carry on with the current stance of 'withdrawal of accommodation, as CPI inflation has gone up to the higher than expected level.

"The repo rate is likely to remain unchanged. With the US Fed rate hike, the possibility of a rate cut remains distant. Having said that, MPC will definitely keep an eye on boosting consumer sentiment and capex momentum," said Damani.

Read more: RBI monetary policy meeting: Date, schedule, time, and expectations 

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