The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is expected to maintain the status quo on the key repo rate during its upcoming bi-monthly review scheduled for October 4-6. The RBI typically holds six bi-monthly meetings in a financial year during which it makes crucial decisions regarding interest rates, money supply, inflation outlook and various macroeconomic indicators.
According to a report by SBI Research, authored by Soumya Kanti Ghosh, Group Chief Economic Adviser; it is anticipated that the repo rate will remain at 6.50%. The report cites the tapering seasonality of inflation as a key factor in this decision. It also suggests that the RBI’s stance should continue to focus on withdrawing accommodation due to the expectation that inflation is unlikely to fall below 5% for the rest of 2023-24.
Regarding economic growth: the outlook remains positive, as stated in the report. It suggests that the rise in oil prices should stabilize, with OPEC+ members not wanting to further disrupt the markets beyond the USD 90 per barrel level. This level is seen as optimal for compensating their production costs while also showcasing their influence over price trajectories.
In the three previous meetings held in April, June, and August, the RBI maintained the repo rate at 6.5%. This decision may be attributed to a relative decline in inflation and the potential for further decrease. Managing inflation has been a priority for many countries, including advanced economies and India has been successful in controlling its inflation trajectory.
Notably, except for the recent pause, the RBI has increased the repo rate by a cumulative 250 basis points since May 2022, as part of its strategy to combat inflation. Raising interest rates is a monetary policy tool that typically reduces demand in the economy, thus contributing to a decline in the inflation rate.
As of August, India’s retail inflation exceeded the RBI’s 6 percent target, standing at 6.83 percent. This increase was primarily driven by rising vegetable and fruit prices. However, experts believe that there is a balance of upside risks.
In August, the RBI revised its retail inflation projections for 2023-24 to 5.4% up from the 5.1% projected in its previous monetary policy meeting in June. Assuming a normal monsoon, the retail inflation forecast includes Q2 at 6.2%, Q3 at 5.7% and Q4 at 5.2%. Retail inflation for Q1 2024-25 is projected at 5.2%.