The Reserve Bank of India’s Monetary Policy Committee (MPC) is likely to keep the repo rate steady at 6.5% during its meeting from June 5 to 7. Persistent food inflation continues to pose a significant threat to the inflation outlook, prompting expectations that the rate-setting panel will leave the monetary policy stance unchanged at ‘withdrawal of accommodation.’
Market experts predict that the MPC will maintain the status quo for the eighth consecutive time. The repo rate, which is the rate at which the RBI lends money to banks to meet their short-term funding needs, is expected to remain unchanged at 6.5%.
Strong growth
Strong growth conditions provide the policy space for the RBI to maintain its current stance, despite inflation remaining above the 4% target. The overall tone of the policy is expected to be cautious, with an emphasis on the upside risks to food inflation due to ongoing heat wave conditions. Daily retail food prices have shown an increase in food inflation pressures in May 2024.
High food inflation
In the fiscal year 2023-24, food inflation surged to 7% from 6.7% the previous year, driven by sustained pressures from prices of cereals, pulses, spices, and vegetables due to overlapping supply shocks. The RBI’s cautious approach is influenced by supply-side disruptions caused by hot weather conditions across many parts of India. The central bank is likely to monitor the progress of the monsoons and the sowing of the summer (Kharif) crop to assess the food inflation trajectory in the latter half of 2024 before considering any shift towards monetary policy easing.
The monetary policy stance of ‘withdrawal of accommodation’ is also expected to remain unchanged. In May 2024, liquidity remained in deficit, averaging Rs 1.42 lakh crore, compared with a surplus of Rs 20,240 crore in April. Limited government spending during the general elections contributed to the pressure on liquidity. The RBI is likely to maintain tight liquidity in the coming months to keep pressure on short-term yields, which may, in turn, support the rupee.
