RBI may hold repo rates amid high food prices: Business Standard poll

Most respondents expect rate cuts from Dec; change in stance unlikely

The Reserve Bank of India (RBI)’s six-member Monetary Policy Committee (MPC) is expected to maintain a status quo for the ninth consecutive policy review, all 10 respondents said in a Business Standard poll. The RBI will announce the policy decisions on August 8.

After increasing the repo rate by 250 basis points (bps) to 6.5 per cent between May 2022 and February 2023, the MPC kept the repo rate unchanged in the previous eight policy reviews.

Gaura Sen Gupta, chief economist at IDFC First Bank, said the tone of the policy would be cautious on food inflation risks. “Food inflation pressures remain elevated due to adverse weather patterns — heatwave conditions during the summer months and a slow start to the monsoon in June. Daily food prices indicate that retail prices remained elevated in July with supplies of perishables such as vegetables disrupted.”

On the positive front, she said, core inflation remains historically low, reflecting no generalisation of price pressures. “Given that growth conditions remain strong, the policy will remain focused on ensuring headline inflation moderates towards the 4 per cent target on a sustainable basis.”

Retail inflation, gauged by the consumer price index, was 5.08 per cent in June. However, food inflation was 9.36 per cent. 

The RBI projected retail inflation for FY25 at 4.5 per cent. In the previous financial year, retail inflation stood at 5.4 per cent.

All respondents, except HDFC Bank, said the RBI would continue with the ‘withdrawal of accommodation’ stance.

“High growth in FY24, combined with inflation of 4.9 per cent in Q1 FY2025, is unlikely to shift the voting pattern of the four members who voted for a status quo in the June 2024 meeting. If the food inflation outlook improves with normal rains 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,” said Aditi Nayar, chief economist, ICRA.

Two of the six MPC members voted in the June meeting to cut interest rates, arguing that an overly tight policy might hinder economic growth.

Sakshi Gupta, principal economist at HDFC Bank, said there was a possibility of a change in stance to neutral as inflation moderates, in line with recent dovish comments by the US Fed and the increasing likelihood of a September rate cut in the US.

In the July policy, US Fed Chair Jerome Powell hinted at potential rate cuts as early as September if economic data aligns with the Fed’s objectives of managing inflation and employment.

The US Federal Reserve maintained its key interest rate at a 23-year high of 5.25-5.50 per cent while acknowledging progress towards its 2 per cent inflation target and possible rate cuts in the next meeting.

A majority of respondents expect the RBI to start cutting rates in December.

“Given the current liquidity conundrum, banking system deposit rates are unlikely to decline as the fight for deposits has intensified with competing asset classes offering compelling returns and tax advantages. This could open up a Pandora’s box in a rate easing cycle,” said Soumya Kanti Ghosh, group chief economic advisor at State Bank of India.

Most respondents expect no change in inflation or growth forecasts, though some expect a revision in the inflation forecast for the second quarter of FY25.

“No change for the year, but the Q2FY25 inflation forecast is likely to be revised higher due to higher vegetable prices. The Q3 FY25 inflation forecast could be revised lower,” said Sameer Narang, head of economic research group at ICICI Bank.