RBI Expected To Maintain Interest Rate Pause As Inflation Trends Downward

The Reserve Bank of India (RBI) is projected to retain the policy repo rate at 6.5 percent in its upcoming statement on June 8. This decision comes as a result of the easing of retail inflation observed in April and the potential for further decline, which experts believe demonstrates the effectiveness of previous policy rate actions. Led by Reserve Bank Governor Shaktikanta Das, the six-member Monetary Policy Committee (MPC) is scheduled to convene from June 6 to 8 to discuss and deliberate on this matter.

The outcome of the committee's 43rd meeting will be officially disclosed on Thursday, June 8.

Following the last MPC meeting held in April, the RBI chose to halt its rate hike cycle and maintained the repo rate at 6.5 percent. Prior to this decision, the central bank had implemented a series of cumulative repo rate hikes amounting to 250 basis points since May 2022 in an effort to curb inflation.

The MPC meets against a backdrop of consumer price index (CPI) inflation falling to an 18-month low of 4.7% in April. The governor of the Reserve Bank recently stated that the May print would be lower than the April print. The May CPI is set to be released on June 12.According to Madan Sabnavis, Chief Economist of Bank of Baroda, the RBI is expected to keep interest rates on hold and keep the repo rate at 6.5 percent.

"The reason is that inflation has come in lower than 5 per cent in April and will be even lower in May. This being the case, the view would be that past repo rate actions have had an effect on inflation and hence there can be another pause taken," he said.

He noted that the policy position will remain one of removal of accommodation because there has already been a rise in liquidity due to the announcement of the exchange of the Rs 2,000 notes. Experts say the RBI will also keep an eye on the monsoon's development and the potential negative impacts of El Nino, which could damage the kharif harvest and thus prices.

"For the year, however, we see 25-50 bps cut in repo rate which will be post October only," Sabnavis said.

The government has directed the RBI to keep CPI inflation at 4%, with a 2% cushion on either side. Bankers anticipate that the central bank will maintain its policy halt in the near future.

"As far as bankers are concerned I would only say that RBI's repo rate has already been increased 2.5 per cent. Expectations from the market or the banking side is that we do not expect that any rise in the repo rate would be there because already the interest rate has been raised by 2.5 per cent on the repo side and inflation is moderate," Rajneesh Karnatak, Managing Director, Bank of India, told PTI.

He also stated that inflation is moderate. "If you look at wholesale and retail inflation data, it is now moderate." "I believe the RBI will take a break and will not raise the repo rate," Karnatak predicted. Bank of Maharashtra executive director Asheesh Pandey echoed his sentiments, saying the RBI would continue to wait and observe before fiddling with interest rates. Taking inflation, banking system liquidity, and recent GDP statistics into account, it appears like the RBI will keep interest rates on hold, according to Pandey.

Experts believe that the RBI's actual actions will be influenced by a number of factors, including economic data, inflation trends, global economic conditions, and current issues. President of the PHD Chamber of Commerce and Industry, Saket Dalmia, stated that the RBI's current policy will sustain the country's demand trajectory and keep GDP growth on track.

"We congratulate the RBI that the effectiveness of policy rates have proven strong with an increase of 250 bps in repo rate, inflation has come down by 310 bps. The ERPR (Effectiveness Ratio of Policy Rate), the ratio of increase in repo rate and decrease in inflation is 1.24; means with an increase of 1 basis point in repo rate, the country was able to reduce inflation by 1.24 basis points," he said.
In response to the RBI's forecasts, Ramnath Krishnan, Managing Director & Group CEO, Icra, stated that inflation readings have reduced, implying that April's surprise respite will likely be prolonged further in June 2023.

"Growth surprised on the upside as well, ruling out early rate cuts. The market will keenly await cues on liquidity management from the RBI, including the impact that is foreseen from the Rs 2,000 notes coming back into the banking system," he said.

The Monetary Policy Committee (MPC) comprises several distinguished individuals. These members include Shashanka Bhide, who serves as the Honorary Senior Advisor at the National Council of Applied Economic Research in Delhi. Ashima Goyal holds the position of Emeritus Professor at the Indira Gandhi Institute of Development Research in Mumbai.

Jayanth R Varma, a Professor at the Indian Institute of Management in Ahmedabad, also contributes to the committee. Additionally, Rajiv Ranjan, the Executive Director of the Reserve Bank of India (RBI), and Michael Debabrata Patra, the Deputy Governor of the RBI, are part of the MPC. Guiding the meetings is the esteemed RBI Governor, Shaktikanta Das.