The six-member monetary policy committee (MPC) is likely to continue with status quo on the policy repo rate at its upcoming meeting to rein in retail inflation, which economists see going up in July due to rising prices of vegetables, cereals and pulses.

If the MPC holds the rate at its meeting, which will take place from August 8 to August 10, it will be the third consecutive time it would have kept the repo rate unchanged at 6.50 per cent.

Repo rate is the interest rate at which banks borrow funds from Reserve Bank of India (RBI) to overcome short-term liquidity mismatches. The MPC last raised this rate from 6.25 per cent to 6.50 per cent at its meeting in February.

The MPC is also likely to stick to its “withdrawal of accommodation to ensure that inflation progressively aligns with its four per cent target, while supporting growth” stance as systemic liquidity is at around ₹2 lakh crore.

As per latest economic data, the Consumer Price Index (CPI)- based retail inflation rose to 4.8 per cent in June from 4.31 per cent in May.

At the same time, industrial growth, based on Index of Industrial Production (IIP), accelerated to a three month high of 5.2 per cent in May from 4.4 per cent in April.

“In India, consumer price inflation eased during March-April 2023 and moved into the tolerance band, declining from 6.7 per cent in 2022-23. Headline inflation, however, is still above the target as per the latest data and is expected to remain so according to our projections for 2023-24,” RBI Governor Shaktikanta Das said in his last MPC statement.

Therefore, close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain. 

“The policy repo rate has been increased by 250 basis points since May 2022 and is still working its way through the system….The MPC will continue to remain vigilant on the evolving inflation and growth outlook…

“Turning to 2023-24, domestic demand conditions remain supportive of growth on the back of improving household consumption and investment activity,” Das then said.

Madan Sabnavis, Chief Economist, Bank of Baroda, expects a status quo decision by the MPC this time.

“Inflation while being lower than five per cent in June is expected to come closer to six per cent in July. The prices of vegetables as well as pulses will continue to exert upward pressure on food inflation.

“GDP growth in the first quarter expected to be closer to 8 per cent in the first quarter, thus indicating stability. There is, hence, no compelling reason to spur growth presently. Hence repo rate will remain unchanged till end of calendar year,” Sabnavis said.

US Fed indication

Besides, US Fed has indicated possible hike in future and treasury yields have moved up.

“Further, with liquidity being comfortable, stance of withdrawal of accommodation will remain. We expect no change in inflation and GDP forecasts,” he said.

Madhavi Arora, Lead Economist, Emkay Global Financial Services, observed that there isn’t much RBI can do in the food supply management but this adds pressure on them to stay vigilant on domestic dynamics.

“Global externalities have already pressed them to signal a wait-and-watch guidance and the transient food spike will only complicate their reaction function. We expect RBI to stay on hold for an extended period,” she said.

Radhika Rao, Executive Director & Senior Economist, DBS, opined that past trends suggest that food inflation tends to influence inflationary expectations, warranting further hawkish rhetoric next week.

Against this backdrop, she expects the RBI MPC to extend its pause on 10 August and keep the stance unchanged at ‘withdrawal of accommodation’.

“The accompanying commentary is expected to reflect their vigilance on inflation, whilst highlighting the supply-driven nature of the recent run-up.

“Terming the sharp rise in food as transient and weather-related, onus would be put on the more effective administrative measures to quell prices rather than tap monetary policy tools,” Rao said.

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