RBI Monetary Policy: Status Quo Or Rate Hike? Here's What Experts Say

The Shaktikanta Das-led monetary policy committee is once again set to meet for key rates decisions this week. The 3-day policy meeting will begin on August 8th, followed by the outcomes on August 10th. The case of yet another 'status quo' from RBI is stronger than the probability of a 'rate hike' in the August 2023 policy. But it is noteworthy that the biggest elephant in the room which began the cycle of rate hikes in May last year, CPI Inflation has picked up for the first time in five months in July and RBI is an inflation trajectory central bank. Because of this, RBI is expected to continue on its cautious stance by maintaining 'withdrawal of accommodation', which gives a clear signal that the fight to tame inflation is not yet over and a rate hike possibility continues to stay in the loop.

In the previous policy, RBI opted for a status quo in policy repo rate at 6.50% for the second time in a row. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. But RBI has stayed on 'withdrawal of accommodation' since the beginning of the rate hike cycle in May last year, and June 2023 policy is the continuation in stance. During this policy, RBI also trimmed the inflation target gradually to 5.1% for fiscal FY24 from earlier 5.2%.

CPI inflation accelerated to a three-month high at 4.81% in July 2023 owing to costlier food prices, compared to 4.31% in May. It was higher than market expectations. Food inflation zoomed to 4.99% from the previous month's print of 2.91%. Although, inflation remained below RBI's upper tolerance limit of 6% since March 2023. The consumer price index has seen a significant drop from February till May 2023.

Since RBI is an inflation trajectory central bank, its policy decisions revolve majorly around the movement of CPI inflation among other key macroeconomic factors. RBI hiked rates by 250 bps from May 2022 to February 2023.

Here's what analysts expect from RBI on August 10:

Umesh Revankar, Executive Vice Chairman, Shriram Finance.

The inflation level has been staying within the tolerance limit of below 6%. Consequently, in the upcoming MPC recommendations, we expect RBI to continue with its stance of pausing policy rate hikes for the next interest cycle. Having said that, inflation in various countries such as the United Kingdom is still a cause of worry. Hence, it is still imperative that we monitor and rein in domestic inflation. The Government of India has taken the right step by banning exports of non-basmati rice in a bid to cool down consumer price inflation.

With respect to credit measures, we expect that the central bank will take steps to bolster credit availability and foster an enabling financial ecosystem. India's farmer community, having had to face the brunt of an uneven monsoon, can expect some financial assistance or relaxation in credit norms. We are confident that the RBI will strike a fine equilibrium between sustaining economic growth and ensuring price stability.

Aditya Damani, Founder & CEO, Credit Fair

The RBI is expected to carry on with the current stance of 'withdrawal of accommodation, as CPI inflation has gone up to the higher than expected level. The repo rate is likely to remain unchanged. With the US Fed rate hike, the possibility of rate cut remains distant. Having said that, MPC will definitely keep an eye on boosting consumer sentiment and capex momentum.

Umesh Mohanan, Executive Director & CEO, Indel Money

The RBI takes into account CPI data to assess the domestic inflation dynamics and CPI inflation is on the higher side and is showing a tendency to move out of the comfort zone of the RBI. Therefore, the central bank is likely to continue with the repo rate unchanged and continue with its current stance of 'withdrawal of accommodation.' Overall, MPC is expected to adopt a hawkish stance.

Further, in a poll conducted by Goodreturns.In, Aditya Vyas, Economist (Fixed Income & Macroeconomic Research) at STCI Primary Dealer also said that RBI will keep the repo rate unchanged in the August meeting.

Miguel Chanco, Chief Emerging Asia Economist at Pantheon Macroeconomics also expects status quo.

Also, Capital Economists in its report said, "The recent surge in food price inflation means the RBI's policy decision on Thursday 10th August is now less of a formality than it had appeared. On balance, we still think that the MPC will keep the repo rate on hold at 6.50% rather than resume tightening. But with the El Niño threat also building, there is a growing risk that, even as other major EMs start their easing cycles over the coming months, the RBI delays the loosening that we currently expect to begin in early 2024."

When asked about RBI's next move, Vyas said "If, in the context of interest rate action, the RBI will hold rates most likely till Q4FY24, assuming inflation and growth tread more or less on expected trajectories." While Chanco expects a 25 bps rate cut in December from RBI.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns. in advises users to consult with certified experts before making any investment decision.