RBI likely to continue status-quo on short-term lending rate, say experts

Coming close on the heels of the interim budget which maintained the status quo on policy front, the Reserve Bank is likely to continue with the pause on the short-term lending rate in its upcoming bi-monthly monetary policy this week as retail inflation is still near the higher end of its comfort zone, say experts.

It is almost a year since the Reserve Bank has kept the short-term lending rate or repo rate stable at 6.5 per cent. The benchmark interest rate was last raised in February 2023 to 6.5 per cent from 6.25 per cent to contain inflation driven mainly by global developments.

The retail inflation in the current financial year has declined after touching a peak of 7.44 per cent in July, 2023, it is still high and was 5.69 per cent in December 2023, though within the Reserve Bank's comfort zone of 4-6 per cent.

RBI Governor-headed Monetary Policy Committee (MPC) will start its three-day deliberations on February 6. Governor Shaktikanta Das will announce the decision of the six-member panel on February 8.

Madan Sabnavis, Chief Economist, Bank of Baroda, said the MPC is likely to maintain an unchanged approach in terms of both rate and stance.

"This is so as inflation, as per the December data, is still high and there are pressures on the food side. This is notwithstanding the fact that core inflation has come down," he said. Going by RBI's forecasts on inflation it would remain above 5 per cent till June end and come down subsequently.

"Also with growth being robust, there is less pressure to think of a rate cut at this time. In fact, the RBI has indicated that the transmission of the 250 bps cut in rates is still not complete and hence there is reason for a pause," Sabnavis said. It would be interesting to see if there are any revisions in the forecasts of GDP and inflation for FY24.

"Also, some sense on how GDP growth would turn out in FY25 will be useful given that the budget has outlined the contours," said the chief economist with the public sector bank.

The government has mandated the central bank to ensure the retail inflation based on the Consumer Price Index (CPI) remains at 4 per cent with a margin of 2 per cent on either side.

On expectations from the RBI on monetary policy, Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA, said the CPI-based inflation is expected to moderate in FY'25, although a well-distributed monsoon will be critical.

"We don't expect any change in rates or stance in the upcoming review. Our baseline expectation is that the earliest rate cut could be seen in August 2024 with a stance change in the preceding review," she said.

Goldman Sachs report expects the RBI to keep the policy repo rate unchanged until the third quarter of calendar 2024 (Q3 CY24).

"With Q1 CY24 headline inflation still above the RBI's target, we maintain our view that the RBI will keep the policy repo rate unchanged at 6.5 per cent at the February 8 policy meeting, continue with hawkish guidance, and reiterate the 4 per cent inflation target. We further expect the RBI to retain its tight liquidity stance," it said.

Meanwhile, Finance Minister Nirmala Sitharaman is scheduled to address the central board of Reserve Bank of India on February 12 and highlight key points of the interim Union Budget presented by her in Parliament on February 1.

It is customary for the finance minister to address the Reserve Bank of India board after the Budget. Dhruv Agarwala, Group CEO, Housing.Com, too expects the central bank to maintain the repo rate at its current level in the upcoming monetary policy meeting.

"This decision reflects the central bank's cautious approach as it navigates the delicate balance between promoting economic growth and keeping inflation in check. With the persistent risk of inflation exceeding the upper limit of 6 per cent, the possibility of a rate cut may only materialize in the latter half of this fiscal year, once inflation shows signs of further moderation. Maintaining the status quo on the policy rate signifies a commitment to stability in interest rates," he opined.

The MPC is entrusted with the responsibility of deciding the policy repo rate to achieve the inflation target, keeping in mind the objective of growth.

In an off-cycle meeting in May 2022, the MPC raised the policy rate by 40 basis points and it was followed by rate hikes of varying sizes, in each of the five subsequent meetings till February 2023. The repo rate was raised by 250 basis points cumulatively between May 2022 and February 2023. The MPC consists of three external members and three officials of the RBI.

The external members on the panel are Shashanka Bhide, Ashima Goyal, and Jayanth R Varma. Besides Governor Das, the other RBI officials in MPC are Rajiv Ranjan (Executive Director) and Michael Debabrata Patra (Deputy Governor).

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