MUMBAI: The rate-setting committee of RBI is expected to keep interest rates unchanged in its meeting this week even though inflation is still above the upper limit of its target zone (2-6%), crude oil prices are nearing the triple-digit mark, and the rupee is close to its all-time low vis-a-vis the dollar.
At 6.5%, the central bank has kept the repo rate unchanged in the last three policies since raising it in February 2023. In August, retail inflation was at 6.8% – lower than the 7.4% reported in July but still above RBI’s target zone.
The monetary policy committee (MPC) of the central bank is meeting from October 4-6 with its decisions scheduled to be announced on the last day. In case the MPC maintains a status quo on rates, its commentary and guidance would be very important, economists said. “We expect the RBI to pause in its October policy,” said Soumya Kanti Ghosh, group chief economic adviser, SBI, in a recent report. “Domestically, we believe at 6.5%, we are in for a prolonged pause as seasonality of inflation is tapering,” Ghosh said.
Inflation is expected to dip in the next few months. “While the headline CPI inflation is still above the RBI’s comfort zone, the softening in prices of agro-commodities since mid-August will likely lead to sub-6% CPI inflation rate in the coming prints,” said Siddhartha Sanyal, chief economist & head research, Bandhan Bank. “This, coupled with negative WPI prints and uneven pace of recovery in various sectors in the economy, will likely prompt the MPC to demonstrate patience and maintain status quo on key policy rates in October.”
Outside of food prices and other domestic factors impacting inflation, rising crude oil prices and bond yields are something that the central bank should be cautious about since this could again put upward pressure on the inflation reading. “The recent spike in crude oil prices and global bond yields shall keep MPC vigilant on inflation-growth dynamics,” said Parijat Agrawal, head, fixed income, Union Mutual Fund. Last week, yield on US 10-year treasury bonds rose to near the 4.7% mark – a level not seen in more than 16 years. Agrawal, too, believes that the MPC would keep rates unchanged at its meeting this week.
Ghosh of SBI believes that the MPC should not “give a forward guidance yet”. And Sanyal of Bandhan Bank says that the MPC commentary is expected to be cautious.
