The Reserve Bank of India (RBI) is expected to keep the key interest rate unchanged at 6.5% during its upcoming Monetary Policy Committee (MPC) meeting scheduled for August 6 to 8, with the decision to be announced on August 8. This anticipated move aligns with expert predictions that the central bank will wait for more comprehensive macroeconomic data before considering a rate cut.
The RBI’s cautious stance is influenced by persistent inflationary pressures, despite the US Federal Reserve maintaining its current interest rate and hinting at potential monetary easing in the future. The RBI has kept the repo rate at 6.5% since February 2023, refraining from changes in its last seven bi-monthly policy reviews.
The US Federal Reserve’s recent stance to maintain interest rates, coupled with hints at possible monetary easing in the near future, has heightened global economic uncertainty. This situation is compounded by recent drops in US payroll data and a rise in the unemployment rate, signaling recessionary pressures. As a result, the RBI is closely monitoring these developments before making any adjustments to its own interest rate policy.
The RBI is also expected to keep a close watch on developments in the US Federal Reserve’s policy, as markets anticipate a rate cut by September.
The domestic factors
In India, economic growth remains on an upward path, which supports the current interest rate level. However, the inflation rate, although high at 5.1%, is expected to decline numerically in the coming months due to the base effect. Given these conditions, the RBI is likely to adopt a wait-and-see approach, ensuring inflation trends downward on a sustainable basis before making any policy changes.
Domestic economic indicators, including stable growth and firm inflation, suggest the central bank will maintain its ‘withdrawal of accommodation’ stance. Additionally, the Indian rupee’s modest depreciation, alongside its strong year-to-date performance among regional currencies, will be considered in the RBI’s decision-making process.
While high growth projections for FY2024 and moderate inflation in the first quarter of the fiscal year support maintaining the current interest rate, a potential change in stance may occur if food inflation decreases following a normal monsoon distribution. If favourable conditions persist without global or domestic shocks, the RBI could shift its stance by October 2024, potentially leading to incremental rate cuts in December 2024 and February 2025.
