RBI To Keep Repo Rate Unchanged At 6.5% In October, About 1.25% Rate Cut Seen In FY25: GoodReturns Poll

The six-member monetary policy committee (MPC) chaired by RBI governor Shaktikanta Das will likely keep the repo rate unchanged at 6.5% next week, according to a poll of 25 economists conducted by GoodReturns.

The poll conducted between September 20-28 showed that the RBI will maintain a status quo in rates for the fourth consecutive policy after aggressively hiking rates by 250 basis points cumulatively from May last year until February 2023.

RBI MPC members will meet between October 4-6, and the policy outcomes will be announced on Friday.

Most major central banks around the world have been raising interest rates in order to tame the red-hot inflation in the past two years. The latest CPI inflation print, although better than expected, still stays above RBI's tolerance limit of 2-6%, which further pushed the expectations of a rate cut to FY25.

"The credit policy this time will most likely continue with the existing rate structure as well as policy stance. Hence, the repo rate will be retained at 6.5% with the stance of withdrawal of accommodation. Inflation is still high at 6.8% 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 have the potential to push up prices further. But as the inflation trajectory is downwards a rate hike can be ruled out." said Madan Sabnavis, Chief Economist, Bank of Baroda.

Over 95%, or 24 out of a total of 25 economists predicted no change in the repo rate during the October 2023 policy meeting. That one expectation is of a rate hike in the range of a massive 30-50 bps by Phillip Capital considering INR weakness, rising food inflation, and yield gap. The median consensus also showed a repo rate of 6.5% for FY24, but the potential of 25 bps to 100 bps rate cut starting Q1 of 2024-25.

Meanwhile, Founder and proprietor Abhishek Upadhyay (NISM certified) expects CPI inflation to come down to the levels of 5% to 5.5% in the coming quarters. He said, "Global inflation also looking to peak out soon and we might see neutral to accommodative monetary policy." Hence, he expects a 25 bps rate cut during the January - March 2024 quarter, sooner than other economists forecast.

In August 2023, CPI inflation eased sharply to 6.83%, far better than what markets forecasted. The drastic decline in inflation was owing to steep moderation in food inflation especially in vegetable prices. Also, core inflation stood at 4.8% in line with expectations.

But despite a sharp decline in vegetable prices, the steep spike in cereals and pulses remains concerning.

According to Dr Chandrima Sikdar, Professor and Associate Dean At Narsee Monjee Institute of Management Studies who is an active researcher in the area of economics, the moderation in vegetable prices resulted in a lowering of the retail inflation, however, prices of cereals and pulses are still on the rise. Further, uneven and inadequate monsoon with the cropping season around the corner continues to pose a threat to food inflation. All these are likely to call for a more cautious approach on the part of the RBI.

Furthermore, not ruling out the probability of an increase in repo rate in the current fiscal, Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said a lot could depend upon the Fed's rate hike in the coming policies. Currently, the US Federal Reserve has kept key fund rates at a 22-year high of 5.25-5.5% but has signalled an additional rate hike before the end of the current year.

Vijayakumar said, "RBI is likely to hold rates in October, but may go for one more rate hike of 25 bp in this rate hiking cycle. A lot will depend on the Fed speak and Fed action, going forward. The Indian market, in the short term, will be influenced more by the movements in the dollar index and US bond yields rather than RBI's action. FPI selling this month (Rs 21287 crores through 26th September) is more in response to the rising dollar and spiking bond yields in the US."

Nevertheless, the majority of economists expect the repo rate to stay at 6.50% by the end of FY24. However, 13 economists out of the total predict RBI's policy repo rate at 6%. Meanwhile, Sikdar expects the FY24 repo rate at 6.4%, but to see further downward revision below 6% in FY25.

However, crude oil prices that have recently reached over a 1-year high may act as a spoilsport for the rate cut trajectory for RBI policy ahead due to its potential for intensifying inflationary pressures.

Geojit's economist said if CPI inflation comes under control a 25 bp rate cut can be expected in Q2 of CY2024. This will not happen if Brent crude rises to $100 per barrel.

Below 6%, the repo rate is expected to range from 5.25% to 5.75% in FY25 by four economists in the poll.