Monetary policy: RBI likely to hold rates for 10th time, shows BS poll

The reconstituted six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is expected to maintain the “status quo” for the 10th consecutive policy review, said all the 10 respondents polled by Business Standard ahead of the  panel’s  meeting during October 7-9.

The RBI will announce the review of the policy on October 9.

The decision to keep rates unchanged would be based on the ongoing risk of food inflation, as daily retail prices, particularly those of vegetables, continue to trend upward, the respondents in the poll said.

After increasing the repo rate by 250 basis points (bps) to 6.5 per cent between May 2022 and February 2023, the rate-setting panel kept the repo rate unchanged in all the previous nine policy review meetings.

“Inflation has eased due to base effects and the headline is still seen moving closer to 5 per cent and has not stayed at below 4 per cent in the last two months. The one year-ahead forecasts remain 4.5-5 per cent with the full-year average at 4.6 per cent levels. On growth, some lead indicators are showing softening momentum, which is seen to bring about a softer policy tone by the end of CY24 but policy action is at least one quarter away,” said Achala Jethmalani, economist, RBL Bank.

Although the headline retail inflation rate in August remained below the MPC target of 4 per cent, it was higher than the revised 3.60 per cent in July because of the rise in vegetable prices. The retail inflation rate stood at 3.65 per cent in August against expectations of 3.5 per cent.

A majority of the respondents said the RBI would continue with the “withdrawal of accommodation” stance.

Separately, the Government of India has announced a buyback of securities of up to Rs 25,000 crore through auction on Thursday. This move is expected to infuse liquidity into the banking system. Surplus liquidity in the banking system stood at Rs 2.88 trillion on Thursday, the latest RBI data showed.

“The policy stance is expected to be unchanged (withdrawal of accommodation). In the past the RBI has preferred to retain policy flexibility by not providing policy guidance. The change in stance has been linked to the future policy rate path and delinked from liquidity. Hence, the stance of ‘withdrawal of accommodation’ is expected to be retained in October. The key change will be a more positive assessment on the inflation outlook,” said Gaura Sengupta, economist, IDFC First Bank.

However, a segment of the respondents expects the panel to change the stance to “neutral”, given that the US Federal Reserve Committee cut the rate by 50 bps.

“ICRA expects the CPI (consumer price index) rate to undershoot the MPC forecast of 4.4 per cent for Q2FY25, although the full-year FY25 print is likely to remain in line with its forecast of 4.5 per cent. Despite the US Fed’s 50 bps rate cut in September, we do not expect any rate action in the MPC’s October meeting, although a change in stance appears possible,” said Aditi Nayar, chief economist, ICRA.

Most participants indicated the decisions on the rate and stance were likely to be unanimous. However, Shreya Sodhani from Barclays Investment Bank noted there might be dissent among the external MPC members, particularly regarding a vote for a rate cut and a shift in stance to “neutral”.

The central government earlier this week appointed three external members to the MPC -- Ram Singh, Saugata Bhattacharya, and Nagesh Kumar -- to replace the outgoing members Jayanth Varma, Ashima Goyal, and Shashank Bhide.

“Because it is their first meeting, they will look to the RBI. I don’t think they will take an interfering stance in at least the first meeting,” said Vikas Goel, managing director and chief executive officer, PNB Gilts.

In the August meeting, two of the six members of the MPC voted for a rate cut, arguing that an overly tight policy might hinder growth.

Jethmalani said: “The new MPC panel is more likely to be data-dependent, especially given the current global environment. It is difficult to say whether all the new members will vote for a cut and/or a neutral stance.”

A majority of the respondents expect no change in the inflation or growth forecast. However, a segment expects a revision in the growth forecast by 15-20 basis points.

“There is a possibility of downward revision in the growth forecast because the RBI seems to be high on growth compared to even the government,” said Goel.