NEW DELHI – The Reserve Bank of India's Monetary Policy Committee is widely expected to leave the policy repo rate unchanged at 6.50% for the fourth consecutive meeting, when the rate-setting panel meets next week, even as upside risks to inflation persist in the form of higher food inflation and rising crude oil prices.
Of the 30 economists, treasurers, and mutual fund managers polled by Informist, 29 expect the committee to leave the repo rate unchanged at the end of its three-day meeting on Oct 6. Meanwhile, the poll respondents unanimously expect the panel to maintain the 'withdrawal of accommodation' stance.
Crude Oil Prices Have Shot Up Since the MPC Last Met In Early August With Brent Crude Oil Prices Trading Close To $95 Per Barrel
The MPC has hiked the repo rate by 250 basis points between May 2022 and February.
Equirus Securities was the only poll participant that expects the committee to raise the repo rate by 25 bps.
Crude oil prices have shot up since the MPC last met in early August with Brent crude oil prices trading close to $95 per barrel, nearly $10 per bbl higher than in August. Economists and bond market participants say the MPC needs to be cautious about the rise in crude prices, but it is unlikely to drive retail inflation sharply higher.
"We do not expect domestic retail prices of diesel and petrol to be impacted by higher global crude prices as oil marketing companies will be under pressure to absorb part of the higher international energy prices," said Rajani Sinha, chief economist at CareEdge. "As a result, the pass-through of global crude oil prices to domestic consumption basket will be limited."
Interestingly, the last two monetary policy statements have not mentioned the annual average crude oil price of Indian basket assumed to calculate CPI and GDP projections. The April monetary policy statement had last mentioned the assumed price of the Indian crude oil basket at $85 per bbl.
The rate-setting committee will take comfort from the spike in vegetable prices coming under control and core inflation waning, even as broader food inflation is expected to remain high in the near future. The retail vegetable price index fell 5.9% in August after a 38.1% sequential jump in July. Core inflation, which excludes food and fuel, was at a 41-month low of 4.8% in August.
Economists expect headline inflation to fall below the upper bound of RBI's inflation target range of 2-6% in September. "According to our tracking estimates, headline inflation will return to the tolerance band in September and could fall below 5% in October," economists at UK-based multinational bank Barclays said in a report.
"Various supply-side measures of the government, such as restrictions on wheat and non-basmati rice exports and reductions in import duties on edible oils, have contributed to stabilising retail food prices," Sinha of CareEdge said. "At this juncture, the RBI will look to support consumption demand and economic growth in the festive season while remaining cautious about inflation."
While food and crude oil concerns are not big enough to force the MPC to think about a rate hike, a few economists expect the RBI to revise its 2023-24 (Apr-Mar) inflation forecast higher by up to 20 bps from the current projection of 5.4%.
On the global front, the US Federal Reserve's "higher-for-longer" interest rate stance, and projection of one more rate hike by this year's end, will keep the Indian central bank on edge.
"The US dollar and bond yields have been on an uptrend. Narrowing interest rate differentials to record low levels poses severe financial instability, thereby warranting a cautious approach by the RBI," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
Market participants will closely watch out for Governor Shaktikanta Das' commentary on the rupee, which has depreciated more than 0.5% since the last policy, and on liquidity conditions in the banking system.
Unlike the last policy, most poll participants do not expect any significant announcement on the liquidity front this time. They expect the RBI to maintain tight liquidity to keep short-term interest rates higher and check the depreciation in the rupee.
Das and other central bank officials are expected to be hawkish in their remarks at the post-policy press conference amidst the prevailing global inflationary pressures.
Analysts have kept their view of no rate cuts in the current financial year intact, with most seeing the earliest possibility for a cut in early 2024-25.
None of the poll respondents expect the central bank to revise its GDP forecasts. The RBI expects India's GDP to grow 6.5% in 2023-24, as against 7.2% in the previous year. End