RBI likely to keep interest rate unchanged at 6.5 pc, say experts

The Reserve Bank of India (RBI) is expected to keep the key interest unchanged at 6.5 percent on Thursday, and will wait for more macroeconomic data before considering a rate cut, according to experts. The US Federal Reserve has also decided to maintain its current interest rate and hinted at potential monetary policy easing in the coming months. Due to ongoing inflationary pressures, the RBI will closely monitor the US monetary policy trajectory before changing its stance on interest rates.

The Monetary Policy Committee (MPC) may choose to hold off on a rate cut as economic growth is picking up, despite the current elevated interest rate of 6.5 percent (repo rate). The meeting of the Reserve Bank Governor Shaktikanta Das-led MPC is scheduled for August 6th to 8th. The decision of the rate-setting panel will be announced on Thursday, August 8th. The central bank last raised the repo rate to 6.5 percent in February 2023, and has since kept it unchanged in its last seven bi-monthly monetary policy reviews.

“We do expect a status-quo position to be adopted by RBI in the forthcoming credit policy. Inflation remains high at 5.1 percent, and although it may reduce in the coming months, it will be primarily due to the base effect,” said Madan Sabnavis, Chief Economist, Bank of Baroda. Madan Sabnavis further mentioned that as growth is stable, the present interest rate situation does not negatively impact businesses. “The RBI would want to ensure that inflation is consistently on a downward path before taking any action.

While we do not expect any change in GDP forecast, there may be new guidance on inflation numbers,” Sabnavis said. Aditi Nayar, Chief Economist, ICRA, stated that high growth combined with the first quarter’s 4.9 percent inflation is unlikely to change the voting pattern of the four members who voted for a status quo in the June 2024 meeting. She also mentioned that if the food inflation outlook improves in the second half of the monsoon season, and in the absence of global or domestic shocks, a stance change is possible in October 2024. This could be followed by a 25 bps rate cut each in December 2024 and February 2025, with an extended pause thereafter.

Governor Das had previously mentioned that any change of stance on interest rates is premature given the gap between current inflation and the 4 percent target. Pradeep Aggarwal, Founder and Chairman, Signature Global (India), also mentioned that the central bank is expected to maintain the status quo on interest rates for now as retail inflation continues to pose challenges.

Puneet Pal, Head- Fixed Income, PGIM India Mutual Fund, also opined that the RBI would keep the rate unchanged. “We think that the upcoming MPC policy may have a somewhat dovish undertone, with fiscal consolidation well on track and the global monetary easing cycle underway, including rate cuts from the Bank of England, ECB, and Bank of Canada,” Pal said, also citing dovish undertones from the last US Fed meeting earlier in the week.

The MPC is responsible for deciding the policy repo rate to achieve the inflation target of 4 percent while considering the objective of growth. The panel consists of three external members and three officials of the RBI. External members of the rate-setting panel are Shashanka Bhide, Ashima Goyal, and Jayanth R Varma.

In a May 2022 off-cycle meeting, the MPC raised the policy rate by 40 basis points and subsequently implemented varying-size rate hikes in each of the five subsequent meetings until February 2023. The repo rate was collectively raised by 250 basis points between May 2022 and February 2023.