RBI MPC Meeting Preview: Will Shaktikanta Das-led MPC maintain status quo on repo rate on Thursday? Here's what you can expect

RBI MPC Meeting Preview: Even though the prices of vegetables and pulses are rising fast and the US Fed also raised interest rates last month, the Reserve Bank of India is unlikely to increase the repo rate when it announces the monetary policy committee (MPC) meeting outcomes on Thursday. The three-day MPC meeting, which started on August 8, is underway in Mumbai. 

The RBI is fighting the growing inflation in the country, which was around five per cent in June and may rise to 6 per cent in July.

But given that India's GDP is still in good health with the March quarter numbers at 6.1 per cent, the RBI may not be in a hurry to propel growth through the rate hike.

While the prices of vegetables, led by tomatos, and pulses are likely to be factors during MPC meeting discussions, policymakers are most likely to consider the effects of El Nino, which triggers drier weather conditions and affects crop yields in different parts of the country.

Rising prices of crude oil is also one of the factors that is likely to grab attention during MPC discussions.

Madan Sabnavis, Chief Economist, Bank of Baroda, expects the RBI to maintain the status quo for the repo rate.

"We do expect a status quo decision by the MPC this time. Inflation, while lower than 5% in June, is expected to come closer to 6% in July. The prices of vegetables and pulses will continue to exert upward pressure on food inflation. The GDP growth of 8 per cent in the first quarter is indicating stability. There is, therefore, no compelling reason to spur growth presently. Hence, the repo rate will remain unchanged till end of the calendar year. Besides, the Fed has indicated a possible hike in the future, and treasury yields have moved up. Further, with liquidity being comfortable, the stance of withdrawal of accommodation will remain. We expect no change in inflation and GDP forecasts." 

The central bank last increased the repo rate to 6.50 per cent in December last year.

The RBI hasn't hiked it in its last three meetings, with the latest being in June.

Vegetable prices, as well as wheat and rice prices, are surging in the country because of weaker monsoon in some parts of the country and floods in other parts of India.

The crop affected due to inclement weather also led to inflation reaching a three-month high of 4.81 per cent in June.

July has been the worst, witnessing record rains in many northern parts of India.

If we keep rising prices issue apart, the indicators such PMI and tax collections are showing that the Indian economy is a good condition. May be just for a short term, it frees the RBI to not ponder much over inflation. 

Deepak Jasani, Head of Retail Research, HDFC Securities, said that the RBI may not rush to hike rates in its MPC meeting.

"As CPI in India showed a small uptick in June 2023 and the main drivers of this, i.e., vegetables and pulses prices are still elevated, the RBI may not want to hurry to cut rates or even change its stance. Inflation could remain elevated in July and August, and if the El Nino pattern plays out in the latter half of the monsoon, this era of high inflation could continue till the end of this calendar. Oil prices globally have also started to inch up. However, we do not expect the RBI to jump the gun and resume rate hikes in its August meet."

He continues, "Investors may get disappointed by less dovish outcome of the RBI MPC meet, but there is no reason to get disappointed by this. Focus will remain on the rest of Q1 results and the global risk appetite that will determine the fund flows into India."

Teresa John, CFA, Deputy Head of Research & Economist, Nirmal Bang Institutional Equities, said: "We expect CPI inflation to come in at 6.5 per cent in July 2023, up from 4.8 per cent in May 2023 on a surge in vegetable prices led by tomatoes. Core inflation is expected to moderate to 4.9 per cent in July 2023 from 5.1 per cent in June 23. 

"We expect the MPC to keep rates on hold at its August meeting. Given the expected surge in CPI, we revise our CPI estimate for FY24 to 5.4 per cent. We now pencil in a rate cut by the RBI only in February 2024 (vs December 2023 earlier) coinciding with a more dovish Fed. WPI inflation is expected to decline by 2.4 per cent YoY in July 2023 after a 4.1 per cent decline in June 2023. 

"Meanwhile, there are no signs of a significant growth deceleration. IIP growth is likely to come in at 5.1 per cent YoY in June 2023 vs 5.2 per cent in May 2023.