A Reserve Bank of India (RBI) logo is seen at the gate of its office in New Delhi.
Reuters Photo
The Reserve Bank of India’s rate-setting panel is likely to maintain a hawkish stance on inflation amid the recent surge in crude oil price and keep policy rates unchanged in its bi-monthly monetary policy review that begins on October 4, analysts said.
The central bank is likely to maintain a status quo on policy repo rate for the fourth time in a row. Currently, repo rate, or the rate of interest at which the RBI lends money to commercial banks, stands at 6.5%. Interest rates on home, car and other loans are governed by this rate.
If the RBI’ Monetary Policy Committee decides to keep the repo rate unchanged the EMIs on home, car and other loans would also remain at elevated levels. Industries, especially home and auto sectors, have been pitching for lowering of interest rates to boost demand.
However, the RBI is likely to keep its focus on bringing down inflation, which has been above its comfort zone for the past couple of months.
Consumer Price Index-based retail inflation, which the MPC tracks, surged to a 15-month high of 7.44% in July largely due to a spike in food prices. It eased in August to 6.83% but remained above the central bank’s upper tolerance limit of 6%.
Analysts said the recent spike in crude oil prices amid “extremely volatile” global economic environment would force the RBI to hold rates for a longer period.
“The global environment is turning extremely volatile with increasing headwinds for emerging economies, amid increasing narrative of higher rates for longer as US growth remains resilient and inflation faces upside risks,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
The US Federal Reserve last month kept the fed funds rate unchanged in a targeted range between 5.25% to 5.5%, the highest level in 22 years.
The gap between the policy rates in India and the US is just around 1%, which is a record low. “Narrowing interest rate differentials to record low levels poses severe financial instability, thereby warranting a cautious approach by the RBI,” said Bhardwaj.
“Domestically too, food inflation risks along with rising crude oil prices remain a concern. We therefore expect the MPC to maintain a hawkish pause,” she added.
The MPC scheduled to meet on October 4-6. This will be the fourth bi-monthly policy review of the current financial year. In all the three reviews conducted in April, June and August, the panel maintained a status quo on the policy rates. However, it has revised inflation and economic growth targets.
Parijat Agrawal, head-fixed income at Union Asset Management Company, said, the headline inflation is expected to cool down in September as compared to August, but would remain above the RBI's comfort zone.
“The recent spike in crude oil prices and global bond yields shall keep MPC vigilant on inflation-growth dynamics. The MPC is expected to maintain the status quo on rates,” Agrawal said.
“We expect the RBI to maintain a hawkish pause all through FY 24, and anticipate the start of rate cuts by the end of the June quarter in 2024,” said Arjun G Nagarajan, chief economist at Sundaram Asset Management Company.