RBI to stand pat on rates as Aug CPI lower-than-view, say economists
Informist, Tuesday, Sep 12, 2023
MUMBAI – The Reserve Bank of India is expected to keep its benchmark repo rate unchanged in the near future as CPI inflation came in lower than expected for the month of August, economists said. The repo rate currently stands at 6.50%.
The meeting of the Monetary Policy Committee of the RBI in August was the third straight time the committee left the repo rate unchanged since the rate tightening cycle began with a 40-basis-point increase in May 2022, followed by three increases of 50 bps each, a 35-bps hike in December, and a 25-bps one in February.
"With inflation evolving along expectations, but staying above target, the RBI MPC is on course to maintain a hawkish pause in October," said Radhika Rao, executive director and senior economist, DBS Group Research.
India's annual inflation rate, based on the Consumer Price Index, moderated to 6.83% in August from a 15-month high of 7.44% in July, data released by the National Statistical Office today showed. The moderation in inflation was primarily on account of statistical effect of a higher base and fall in vegetable prices.
Upasna Bhardwaj, chief economist, Kotak Mahindra Bank, said that the lower than view figures should provide some breathing space to the RBI. "Overall today's readings reinforce our view of a prolonged policy rate pause with a clear caution on any risks arising for generalised inflation," Bhardwaj said.
Nikhil Gupta, chief economist, Motilal Oswal Financial Services, also believes that the central bank will stay put on rates for the foreseeable future.
There is risk of further upward pressure on food inflation given the skewed rainfall and low reservoir levels. The recent spike in global crude oil prices is also concerning, Rajani Sinha, chief economist, CARE Ratings, said. However, a comforting factor is that the continued deflation in Wholesale Price Index will have a lagged impact on CPI inflation going forward. While the RBI will remain cautious, we expect an extended pause in policy rates in 2023, she said.
The food price index was down 0.7% on month in August, the first decline in six months, and the sharpest decline since December.
In its policy review in August, the RBI revised upward its inflation forecast for the current financial year ending March by 30 bps to 5.4%, assuming a normal monsoon.
Earlier this month, Governor Shaktikanta Das said that the RBI remains on guard to ensure that the spike in vegetable prices does not become generalised and lead to second-round effects. We will only act if vegetable inflation starts transmitting to other items, Das said.
The next meeting of the Monetary Policy Committee is scheduled from Oct 4-6. End
