Expect status quo by RBI in October policy meeting: SBI Research

The monetary policy committee of the Reserve Bank of India (RBI) is expected to yet again pause the key repo rate at its next bi-monthly review scheduled in the first week of October, according to SBI Research.

The meeting is scheduled for October 4-6. RBI typically conducts six bi-monthly meetings in a financial year, where it decides interest rates, money supply, inflation outlook, and various macroeconomic indicators.

“Domestically, we believe at 6.50%, we are in for a prolonged pause as seasonality of inflation is tapering first...,” SBI Research report, authored by Soumya Kanti Ghosh, Group Chief Economic Adviser, said.

“We believe the (RBI's) stance should continue to be withdrawal of accommodation as inflation is unlikely to tread below 5 per cent in rest of 2023-24.” On growth, it said the outlook continues to be strong.

“Spiraling oil prices should take a breather at these levels as vocal members of OPEC+ may not like to destabilize the markets further in the long run beyond USD 90/bbl having reached the optimal level where their production cost is adequately being compensated while also successfully having signalled to the world the power they wield over prices trajectory,” the report said.

RBI in its past three meetings – April, June, and August -- held the repo rate unchanged at 6.5 per cent. The repo rate is the rate of interest at which RBI lends to other banks.

A relative decline in inflation and its potential for further decline may have prompted the central bank to put the brake on the key interest rate again. Inflation has been a concern for many countries, including advanced economies, but India has managed to steer its inflation trajectory quite well.

Barring the latest pause, the RBI raised the repo rate by 250 basis points cumulatively to 6.5 per cent since May 2022 in the fight against inflation. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.

India's retail inflation in August was over RBI's 6 per cent target at 6.83 per cent largely due to a spurt in vegetable and fruit prices, but experts see upside risks are balanced.

RBI in August upwardly revised the country's retail inflation projections for 2023-24 at 5.4 per cent, against 5.1 per cent it projected in its previous monetary policy meeting in June.

Assuming a normal monsoon, retail inflation is revised to 5.4 per cent, with Q2 at 6.2 per cent (above RBI's 6 per cent upper tolerance band), Q3 at 5.7 per cent and Q4 at 5.2 per cent. Retail inflation for Q1 2024-25 is projected at 5.2 per cent.