India central bank watchers have plenty of reasons to tune into Governor Shaktikanta Das’s policy decision on Thursday even though most expect he’ll keep interest rates unchanged again.
Global markets have been roiled in recent weeks by central bank action, with the Bank of England cutting interest rates last week, the Bank of Japan hiking, and the Federal Reserve preparing to ease amid recession fears. That may give the Reserve Bank of India reason to stay cautious after keeping rates steady for 18 months already.
But there is a chance the RBI may signal a pivot is coming months. Thursday will be the last rate decision of the six-member monetary policy committee before its current four-year term expires in October. Some economists expect the MPC may want to go out with a bang by possibly setting the stage for policy easing.
All except one of the 43 economists surveyed by Bloomberg News predict the repurchase rate may stay unchanged at 6.5%. Bloomberg Economics’ Abhishek Gupta predicts a quarter-point cut.
Here are some of the key issues that will likely influence the RBI’s decision:
Inflation remains above the 4% target
Das has warned against any premature cut. Inflation in June jumped to 5.08%, more than 1 percentage point above the RBI’s target, largely because of high food prices. While inflation may ease in July and August for statistical reasons, it’s expected to pick up again in September. The RBI is forecasting inflation will average 4.5% in the fiscal year through March.However, the government is in the process of revising its consumer price index and will likely reduce the weighting of food, a move that could curb inflation spikes in future. That may give the central bank more confidence of meeting its 4% inflation target. Bloomberg Economics’ Gupta estimates that inflation is 70 basis points higher than it should be using new weights for CPI.
What Bloomberg Economics Says
We expect the RBI’s rate-setting committee to vote unanimously for a 25-bp cut in the policy rate to 6.25% at its Aug. 8 review and a switch to a neutral policy stance. This would mark the start of an easing cycle after a hawkish hold for eight straight meetings since April 2023.
Growing calls for rate cuts from within the MPC
The RBI is coming under pressure, both from within the MPC and in official circles, to adjust its policy. External MPC members Jayanth Varma and Ashima Goyal voted for rate cuts in the policy meeting in June. Another external member highlighted the risk that too tight monetary policy will have on economic growth.
Separately, V Anantha Nageswaran, India’s chief economic adviser and a top official in the Ministry of Finance, argued recently that the RBI’s target should exclude food prices, which can’t be directly influenced by interest rates.
Central banks around the world are pivoting
With the Fed looking to cut rates, central banks in emerging markets are on guard as currency markets wobble. To avoid volatility, policymakers elsewhere may follow the Fed.
Das has said India’s monetary policy is independent and it won’t necessarily follow the action of the US central bank. Gaurav Kapur, chief economist of IndusInd Bank Ltd., also argues that India’s record high reserves, low current account deficit and stable rupee give the RBI enough buffer to focus on domestic inflation.
A possible shift in the policy stance
The RBI has retained its relatively hawkish policy stance of “withdrawal of accommodation” since April 2022. Some economists expect it may now shift to a “neutral” stance to signal a possible rate cut in coming months.
“We expect both the policy repo rate and monetary stance to remain unchanged in the August policy, though we are of the opinion that the stance should change to neutral,” said Kaushik Das, chief economist for India at Deutsche Bank AG.
A shake-up in the monetary policy committee
The MPC is in for an overhaul this year. The terms of the three external members end on Oct. 6 and can’t be renewed. The other three members of the MPC are Das, whose current term ends in early December, Deputy Governor Michael Patra, whose contract runs until early January, and Executive Director Rajiv Ranjan.
Two external members voted for cuts in the last policy and a third one, Shashanka Bhide, acknowledged that high rates are hurting. Economists will be watching closely if Bhide also votes for a cut. If there’s an even split in the voting between the external members and the RBI members, the governor has the deciding vote.
Liquidity action after bond index inclusion
This will also be the first policy decision after India’s inclusion in the JPMorgan Chase & Co. bond index, with bond traders watching out for any commentary on how the RBI will manage liquidity and contain volatility in the bond and currency markets. The central bank resorted to bond sales for three successive weeks. Excess liquidity in the banking system is at a one-year high amid the central bank’s forex market intervention and the government’s post-election spending.
The RBI has sold net 101.05 billion rupees of bonds in the secondary market in the three weeks to July 28, in a move which surprised investors. The monetary authority has also been conducting variable reverse repos to take out shorter-duration liquidity.
“This balancing act in managing liquidity conditions is likely to continue,” Shreya Sodhani, a regional economist at Barclays Plc, wrote in a note. “While the RBI does not have a stated preference for a particular level of liquidity surplus or deficit, we think it is likely wary of the weighted average call rate veering too far from the repo rate, which explains its burst of activity in July.”
