According to an ET poll of 10 respondents, the RBI is likely to keep the repo rate unchanged at 6.50%, marking the 10th consecutive bi-monthly statement in which it has maintained a status quo on rates. The repo rate is the rate at which the RBI lends to banks. The newly reconstituted MPC meets October 7-9. The MPC’s last three day meeting was from August 6-8.
Even as headline retail inflation has eased over the past few months, with the August consumer price index (CPI) reading at 3.65%, economists said that a likely rise in the price gauge in September would prevent the RBI from joining the ranks of central banks in some advanced economies and reducing interest rates.
The MPC’s target for headline retail inflation is 4%, with a tolerance band of 2 percentage points on either side of that. For over a year now, the central bank has been battling high food inflation caused by weather disruptions and supply side issues.
‘Food Price Pressures may Ease by Year-end’
However, with a normal June-September monsoon, analysts expect food price pressures to ease by the end of the calendar year.“I think we can all agree that high inflation has persisted and will remain there for the next few months,” said Bank of Baroda chief economist Madan Sabnavis. “So there will be a pause in change in rate and stance, as it will be too premature with the ongoing war and inflation. What will be interesting is their forecasts on inflation and if they keep up with the 4.5% inflation prediction for the next year.” Food inflation, which accounts for around half the overall CPI basket, rose to 5.66% in August, from a 13-month low of 5.42% in July, the latest data showed. Retail inflation rose to 3.65% on an annual basis in August against 3.54% a month earlier.Geopolitical conflict
Aside from the need to ensure the inflation decline will be sustained, the recent escalation in the violence in West Asia is another factor that would likely prevent the MPC from bringing down rates, as supply chain disruptions posed by the conflict have caused upside risks to global commodity prices.
Crude oil prices have surged in the last week by over 5% due to the West Asia troubles. Brent crude prices were 5.03%, at $77.62 a barrel over concerns that escalation could prompt Iran to block the Strait of Hormuz, according to Reuters.
The strait is a key logistical choke point through which a fifth of daily oil supply passes. An upside in crude oil prices is detrimental for domestic trade and inflation as India is a major importer of the commodity.
Stance change?
While none of the respondents expected a change in the repo rate, five institutions predicted a change in the monetary policy stance to neutral from the current one of withdrawal of accommodation.
Analysts pointed to the RBI’s tolerance of surplus liquidity in the banking system as a sign of the central bank willing to accept slightly looser financial conditions while keeping the benchmark policy rate unchanged for now.
With credit expansion outpacing deposit growth and heavy foreign inflows into Indian debt, the central bank has permitted surplus liquidity conditions since July, barring a few days in September when quarterly advance tax payments drained the system of funds.
“There has been ample liquidity since July, and the RBI is not doing much to sterilise this liquidity, and overnight rates have also been lower than repo rates,” said Kotak Mahindra Bank chief economist Upasna Bhardwaj. “Even though they have said ‘withdrawal of accommodation,’ this surplus liquidity means that they (RBI) have started accommodating. All of this does indicate that the RBI should now suggest something.”
In August, daily average surplus liquidity in the system stood at Rs 1.5 lakh crore, while September saw an average of Rs 1.29 lakh crore, stripping out seven days when the system was in deficit. In July, the average was at Rs 1.34 lakh crore, an analysis of central bank data showed.
The global interest rate scenario is also now more favourable for the RBI, with the US Federal Reserve delivering a 50 basis point rate cut last month, along with an easing of rates by the Bank of England and the European Central bank in the past months.
While the Indian central bank has made clear it’s driven by domestic inflation considerations, rate cuts in advanced economies mean a wider rate differential with advanced economies. A wider interest rate differential plays an important role in the rupee exchange rate, with a shrinking gap typically leading to weakness in the local currency.