The Reserve Bank of India (RBI) is expected to maintain its current monetary policy stance in the near term, with no imminent rate cuts on the horizon. Despite the global trend of central banks easing monetary policy, India’s central bank appears committed to focusing on inflation control, particularly in the context of persistent food price shocks.
Market participants are now anticipating that any rate cuts by the RBI are unlikely to occur before December or even February. The upcoming change in external members of the Monetary Policy Committee in October may bring fresh perspectives, but the central bank’s overarching focus on aligning inflation with its 4% target is expected to remain steadfast.
The RBI has not altered its repo rate since February 2023 and has kept its policy stance unchanged at ‘withdrawal of accommodation’ since June 2022. While central banks in Europe and the UK have begun lowering interest rates and the US Federal Reserve is widely anticipated to do the same soon, the Indian central bank seems intent on maintaining its current stance.
Inflation a bugbear
Inflation continues to be a significant concern for the RBI, with the headline Consumer Price Index (CPI) inflation rising to a four-month high of 5.08% in June 2023. This increase was largely driven by a surge in food prices, which have proven resistant to disinflation efforts. The RBI has revised its inflation forecast for the July-September period to 4.4%, up by 60 basis points, indicating that the central bank anticipates continued inflationary pressure from food prices.
In contrast, India’s growth remains robust, with the central bank maintaining its GDP growth forecast for 2024-25 at 7.2%. This relative strength in growth gives the RBI some leeway to prioritize inflation control over immediate rate cuts. The current policy repo rate of 6.50% is considered appropriate by the central bank, given the neutral interest rate levels observed in recent quarters.
Financial stability is also a priority for the RBI, with concerns raised about the banking sector’s liquidity and the rapid growth of credit compared to deposits. The central bank has urged banks to innovate in mobilizing deposits and to monitor the end-use of home equity loans closely to mitigate potential risks.
