The six-member monetary policy committee (MPC) is likely to maintain status quo on the policy repo rate at its upcoming meeting to support growth impulses in the ongoing festive season even as it will turn watchful on the possibility of uneven monsoon and rising global crude oil price exerting inflationary pressures. 

The MPC stood pat on the policy repo rate in all three meetings held in the current financial year so far. Currently, the repo rate (the interest at which banks and primary dealers borrow funds from RBI to overcome short-term liquidity mismatches) is at 6.50 per cent.

Given that the latest retail inflation reading for August (6.83 per cent against 7.44 per cent in July) is still above the MPC’s upper tolerance level of 6 per cent, the committee is expected to persist with its “withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth” stance, say experts.

The MPC is scheduled to meet for two days, beginning October 4th, and announce its decision on repo rate and monetary policy stance on October 6th.

Madan Sabnavis, Chief Economist, Bank of Baroda, said: “The credit policy this time will most likely continue with the existing rate structure as well as policy stance

“…Inflation is still high at 6.8 per cent and while we do expect it to come down sharply in September and October, there is still some pessimism on Kharif output especially relating to pulses which has potential to push up prices further. But as the inflation trajectory is downwards a rate hike can be ruled out. ”

However, the wait for the MPC to cut the repo rate a could get longer.

“In this context, the RBI will revise the Q2 (July-September) inflation numbers for certain and maybe also that for the year. But we do not expect the headline number to change by more than 0.1 per cent.

“We do not expect any specific liquidity measures as it is tight today and the RBI is in the process of rolling back the ICRR (incremental cash reserve ratio) which was invoked in the last policy,” he said

Sabnavis opined that the RBI may have to look at ways to induce liquidity through OMO (open market operations) or V2R (variable rate repo auction) in case the liquidity situation remains as tight as it is today given that the banks are seeking recourse to the MSF (marginal standing facility) on a daily basis.

Given the current circumstances, the RBI is likely to prioritise supporting economic growth, especially during the festive season, while remaining cautious on inflation, Rajani Sinha, Chief Economist, and Sarbartho Mukherjee, Senior Economist, CARE Ratings.

Therefore, they expect the RBI to keep its policy rates unchanged, with a unanimous decision, while adhering to its stance of ‘withdrawal of accommodation.’

The RBI is also likely to find comfort in the fact that the Wholesale Price Index (WPI) continues to remain in deflationary territory, and core inflation remains relatively benign, they said. In August, core inflation moderated to 4.9 per cent, down from 5.1 per cent in July.

“We do not anticipate any further rate hikes by the RBI in this fiscal year. The MPC is expected to consider rate cuts after the first quarter of the upcoming fiscal year,” Sinha and Mukherjee said.

They noted that domestic challenges encompass growing risks to consumption demand amid soaring food inflation, an uneven monsoon adversely affecting kharif crops, higher interest rates and rising global crude oil prices.

Karthik Srinivasan, Senior Vice President & Group Head - Financial Sector Ratings, ICRA, expects the MPC to maintain status quo on the policy rate as well as the stance as inflationary pressures may arise because of weaker monsoon and rising crude oil prices.

The significant tightening in liquidity that was seen in the second half of September is unlikely to sustain, particularly with the release of liquidity from incremental CRR imposed in previous policy, he said.

Karthik opined that the RBI is likely to remain cautious on sharp rise in interest rates in developing economies since the last policy review and the impact it may have on the capital flows, forex reserves and the exchange rate as well.