Experts expect the Reserve Bank to maintain the status quo on policy rates at its bi-monthly monetary policy review meeting early next month as retail inflation remains high and the US Federal Reserve remains hawkish. The Reserve Bank hiked the benchmark repo rate to 6.5 percent on February 8, 2023, and has kept it there due to significant retail inflation and global causes like rising crude oil costs.
The Reserve Bank Governor-led six-member Monetary Policy Committee (MPC) meets October 4-6, 2023. The highest grading panel, the MPC, met last in August. We expect the RBI to maintain the status quo due to high inflation and constrained liquidity. According to RBI forecasts, inflation will be above 5% in Q3 and Q4, ensuring the status quo for the year and maybe Q4 “Madan Sabnavis, Bank of Baroda Chief Economist. Sabnavis added that Kharif crop uncertainty, especially pulses, could raise prices.
He continued, “The comfort is that there is less concern on on-target growth.” CPI-based retail inflation fell to 6.83 percent in August from 7.44 percent in July, but it remained above the Reserve Bank’s comfort level of 6. The government has ordered the RBI to target inflation at 4% with a 2% cushion. ICRA Limited Chief Economist Aditi Nayar expects headline CPI inflation to fall to 5.3-5.5 percent in September 2023 from 6.8 percent in August 2023 due to the halving of tomato prices and a favorable base.
“We expect CPI inflation to ease to 5.6% in Q3 FY2024 and 5.1% in Q4 FY2024, amid upside risks to food inflation due to uneven and sub-par monsoons and low reservoir levels on Kharif yields and Rabi sowing,” she said. In October 2023, Nayar stated ICRA expects the MPC to remain on hold while being cautious due to food inflation and rising crude oil costs. The Reserve Bank expects 2023-24 CPI inflation to be 5.4%, with Q2 at 6.2%, Q3 at 5.7%, and Q4 at 5.2%, with risks evenly balanced. Forecasted Q1 2024-25 CPI inflation is 5.2%.
Sanjay Bhutani, Director, Medical Technology Association of India (MTaI), expecting the next bi-monthly monetary policy, said the RBI has followed market sentiment of keeping the benchmark interest rate at 6.5 percent for some time. However, the central bank could consider lowering interest rates to support economy, he said. “If that is not possible in view of high retail inflation and the Federal Reserve’s hawkish stance, the medical technology sector, which is struggling with high debt, does expect the RBI to continue with the pause and provide some firm indication of easing rates in the near future,” Bhutani said.
The interest rate environment has worsened since MPC’s August policy review, according to Trust Mutual Fund CEO Sandeep Bagla. US and Indian economies have grown resiliently, but inflation has soared over comfort levels. “US treasury yields have risen sharply as crude oil prices have risen, boosting inflationary concerns while food prices have fallen. He said the MPC will evaluate all these variables and maintain repo rates when headline inflation falls in the coming months.
When setting bimonthly monetary policy, the Reserve Bank focuses on CPI-based inflation. Since RBI lifted the repo rate from 6.25 percent to 6.5 percent in February, borrowing costs have stabilized. Later bimonthly policy reviews in April, June, and August maintained the benchmark rate. The MPC has three RBI staff and three external members. External panelists Shashanka Bhide, Ashima Goyal, and Jayanth R Varma. RBI Executive Director Rajiv Ranjan and Deputy Governor Michael Debabrata Patra join Governor Das in MPC.
Conclusion:-
For the fourth consecutive time, the RBI will maintain a status quo on policy rates at its bimonthly monetary policy review meeting. Retail inflation is strong, thus the US Federal Reserve is staying hawkish. The Reserve Bank hiked the benchmark repo rate to 6.5% in February 2023 and has maintained it due to high retail inflation and global factors like rising crude oil costs. Money Policy Committee (MPC) meets October 4-6, 2023. Experts expect the RBI to maintain the status quo due to high inflation and liquidity shortages. In August 2023, CPI-based retail inflation exceeded the Reserve Bank’s comfort level of 6%. The MPC is projected to hold its October 2023 policy while remaining cautious due to food inflation and rising crude oil costs. The medical technology sector expects the RBI to maintain the pause and signal foreseeable rate cuts.
