Monetary Policy: Here's What Markets Expect From RBI On August 10

Indian markets kickstarted the week on a positive note, just a day before the commencement of RBI's three-day monetary policy meeting. On Monday, Sensex gained by at least 240 points and even neared its critical psychological mark of 66,000, while Nifty 50 jumped nearly 69 points. Six-member monetary policy committee will meet from August 8 to 10, with the outcomes on policy rates to be announced Thursday. The majority of market experts have factored a 'status quo' in the policy repo rate for the August meeting. If that is the case, it would be the third consecutive policy where rates have remained unchanged at 6.5%.

At the time of writing, Sensex traded at 65,804.17, up by 82.92 points or 0.13%, and Nifty 50 performed at 19,540.70, higher by 23.70 points or 0.12%.

Both Nifty and Sensex have corrected significantly by 228 points and 963 points in the last two week's trading sessions. It will be keenly watched if RBI's August policy outcomes could give it the much-needed lift!

In contrast to the latest 25 bps hike by the US Federal Reserve, RBI is expected to continue on the path of 'status quo'. However, some even bet RBI to be cautious and hawkish after CPI inflation accelerated to 4.81% in June 2023 for the first time in five months. Hence, the policy stance of 'withdrawal of accommodation' is likely to be kept unchanged.

Currently, RBI's policy repo rate stands at 6.5%. Consequently, the standing deposit facility (SDF) rate remains at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate are at 6.75%. In the July 2023 policy, RBI projected CPI inflation at 5.1% for fiscal year FY24, and GDP growth is estimated at 6.5%.

RBI hiked rates by 250 bps from May 2022 to February 2023. However, the central bank has been pausing rates since the first bi-monthly policy of FY24 (April 2023). This is because inflation has eased significantly in 2023 and has been below RBI's tolerance limit since February.

Here's what market experts believe RBI will announce on August 10:

Mahesh Agarwal National Head of Wealth at AUM Capital

We expect the RBI to maintain a cautious and hawkish stance in its upcoming monetary policy meeting. The rise in inflation is also causing a rise in food prices, specifically in the price of vegetables in July. In June, the Consumer Price Index (CPI) showed an inflation rate of 4.81%. Similarly, core inflation in June was lower at 5.1% than 5.2% in May. As a result, CPI is likely to accelerate in the next few months because of the erratic effects in monsoon have affected the farmers. Floods in the northwest and insufficient precipitation in the south and east have slowed harvesting. The market for cereals is actually on the rise, both domestically and internationally. In particular, the latter category is impacted by geopolitical developments such as the Black Sea grain trade agreement. Furthermore, El Nino-related weather uncertainties exist, elevating the possibility of a delayed start to the policy easing cycle. Subsequently, The surprise surge in retail inflation for June has pushed the rate cut possibilities to the next financial year. Hence, We expect RBI to keep the policy rates and stance unchanged in the forthcoming policy.

Rajesh Sharma, Managing Director - Capri Global Capital Limited

"In contrast to the aggressive stance taken by the U.S. Federal Reserve and Bank of England, the Reserve Bank of India (RBI) is expected to keep its benchmark repo rate unchanged for the third consecutive time during its upcoming bi-monthly policy. The present inflation rate in India is reported to be running at less than 5%, which has provided some room for the central bank to maintain a steady monetary policy. However, there are concerns about potential upside risks to this inflation number in the forthcoming months, primarily due to the substantial increase in prices of vegetables and pulses, which should prompt the MPC to maintain status-quo on rates."

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers

Further rate hikes in India are unlikely, with current inflation 50 basis points lower than the long-term average and the country's existing policy rate 50 basis points higher than the 10-year average. Retail inflation in India, on the other hand, has been significantly higher than projected in the last month, and major price pressures are noticeable for certain categories, particularly in the food category. At the same time, India's economic statistics remain optimistic. As a result, another 25 basis point rate hike in India is not completely ruled out. We believe that the Monetary Policy Committee will conduct at least another review to evaluate whether the inflationary risk is much higher than previously expected. The repo rate remains unchanged at 6.5% since February and is likely to continue the same till the next calendar year.

Raghvendra Nath, MD, Ladderup Wealth Management Pvt. Ltd.

"Although the global markets witnessed an increase in interest rates, the RBI is unlikely to follow suit. It is expected that the RBI is set to keep the repo rates unchanged for the third time in a row since the last hike in February raising interest rates by 25bps to 6.5%. The expectations are mainly due to inflation being in line with the RBI's range of 4% (with +/- deviation of 2%) with core inflation at 5.1% in June 23. Although the rising food prices are a cause for concern which would lead to inflation numbers exceeding the target range, this would likely be a one-off effect due to the monsoon effect, and hence an increase in repo rates wouldn't be needed. RBI's decision to announce further rate hikes would be based on the inflation data for the next 2 months due to the monsoons rather than demand-supply."

Disclaimer

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