At the end of its three-day meeting on Thursday, the monetary policy committee of Reserve Bank of India is widely expected to leave the repo rate as well as the policy stance unchanged even as inflation has inched up since the last meeting.
If done, it will be the third time the central bank would be leaving the repo rate unchanged at 6.50%.
However, there’s no doubt that inflation will take centre-stage during the 3-day panel discussion in the backdrop of the recent surge in vegetable prices, particularly tomatoes. Since June, prices of tomatoes have increased by more than 5 times.
Meanwhile, crude oil prices have inched above $80 a barrel after hovering at around $74 a barrel in May.
The consumer price inflation in May and June remained benign at 4.3% and 4.8%, respectively, and within the RBI’s tolerance band of 2-6%.
However, the high vegetable prices and rising oil prices have created upside risks to inflation for July. The CPI inflation data will be released after the RBI policy in the next week.
“We see July CPI inflation rise to 6.6% YoY. As inflation is once again set to breach the upper limit of MPC’s tolerance band, concerns surrounding their stance and action on Aug 10th have resurfaced,” said Aastha Gudwani, India Economist at BofA Securities, in her pre-policy note.
Will RBI Pre-empt rate hike?
While upside risks to inflation prevail both from rising prices of tomatoes and crude oil, a majority of the economists do not see RBI pre-empting a rate hike on Thursday.
“More rate hikes may not be warranted in this cycle; although MPC may choose to maintain a longish pause before reversing the rate cycle,” said Nuvama Institutional Equities.
MPC would like to remain vigilant by retaining its stance as ‘withdrawal of accommodation’ given near-term upside risks stemming from food inflation and continued hawkishness of the US Federal Reserve and European Central Bank, the brokerage said.
Das Modus Operandi
With vegetable prices playing spoilsport and making the task difficult for the RBI to bring down inflation to the midpoint of the target range, Governor Shaktikanta Das’ tone on the evolving domestic as well as global developments will be critical for Dalal Street investors.
Until the last policy meet, expectations were building for a longer pause and possibly a rate cut later in 2023. However, the prevailing conditions have somewhat dampened the expectations.
“Fed and RBI alike suggest a “When the Facts Change, I Change My Mind” mode. So, it is expected that going ahead, only data will decide the course and fate of interest rate,” said Umesh Kumar Mehta, CIO, Samco Mutual Fund.
Whether the central bank will for now retain its CPI projections for 2023-24 (April-March) or tweak it will be closely watched by investors.
“Given the transitory uptick in selected food items, RBI may sound wary of the impact of high food inflation on inflation expectations. Higher food inflation for Q2FY24 is expected to overshoot RBI’s projection (5.2% as per the last MPC meeting) by almost 100 bps,” said Rahul Bhuskute, chief investment officer, Bharti AXA Life Insurance.
Srikanth Subramanian of Kotak Cherry does believe that the chances of a rate cut this year has somewhat diminished.
“RBI is expected to remain data dependent going forward, though the increase in inflation prints in June and what we expect in July, the chances of interest rate cut in 2023 looks lower,” he said.
How will Dalal Street React?
Since the last policy meeting, the benchmark Nifty 50 has net gained 5% on the back of strong foreign inflows and decent corporate earnings.
However, the downgrade in the credit rating of the US dampened the momentum in the recent sessions.
If the central bank leaves rates unchanged and does not sound very hawkish on the inflation front, then it could bring in a short-term relief rally in the market.
In terms of levels, for bulls, a fresh uptrend rally is possible only after Nifty 50 crosses the 19,635 level, said Shrikant Chouhan, head of research (Retail), Kotak Securities, as this could take the index to the 19,700-19,735 zone.
But if the index slips below 19525 level, then the selling pressure is likely to accelerate and the index could retest the levels of 19480-19450, Chouhan said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
