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Singapore-headquartered DBS Group expects the Reserve Bank of India (RBI) to keep the repo rate unchanged at 6.5 per cent for the rest of the calendar year.
Three Monetary Policy Committee (MPC) review meetings are scheduled in August, October and December, respectively. The RBI has held the repo rate unchanged during the last eight meetings, including the recent June 7 meeting.
The MPC is unlikely to relent in the short term as a prolonged heatwave and rainfall shortfall in June hurt vegetable production and drove prices higher, according to the DBS Group research note.
“The policy committee, in our view, will prefer to extend its wait-and-watch position, seeing through base-effect driven swings in inflation. We expect the repo rate to stay unchanged in 2H24,” Radhika Rao, Executive Director and Senior Economist, DBS Bank, said in the note.
Commenting on the upcoming release of CPI inflation data for June 2024 on Friday, Rao said that a delayed start to the southwest monsoon and prolonged heatwave is likely to have pushed June inflation to 5 per cent year-on-year, higher than the trend anticipated earlier in the month.
“As June progressed, vegetable prices began to rise sharply, alongside pressure from a telecom tariff price hike, and a moderate rise in kharif MSPs [minimum support price]. At this juncture, with rain regaining momentum into July, vegetable prices are expected to moderate, benefiting from the crop’s short growth cycle.
“Base effects will also push July-August inflation to sub-4 per cent, allaying concerns. Nonetheless, the RBI has already signalled that they will look through base effect-driven swings in readings, instead of focusing on sticky food pressures. We expect rates to stay on hold this year,” she added.
The repo rate is a benchmark interest rate used by the RBI to facilitate the smooth operation of the monetary system. Put simply, it is the rate at which the RBI lends money to banks.
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