RBI likely to keep rates unchanged as inflation risks stay in focus

The central bank's six-member Monetary Policy Committee, headed by Governor Sanjay Malhotra, is expected to leave the repurchase rate unchanged at 5.25%

By Anup Roy and Subhadip Sircar

 

The Reserve Bank of India is expected to keep interest rates unchanged on Wednesday as policymakers assess whether higher energy costs from the renewed Middle East conflict spill over into broader inflation before raising borrowing costs.

 

The six-member Monetary Policy Committee, headed by Governor Sanjay Malhotra, is seen holding the repurchase rate at 5.25 per cent, according to all but one of 30 economists surveyed by Bloomberg. Capital Economics Ltd’s Shilan Shah is alone in forecasting a quarter-point hike. 

 

The committee is also likely to retain a neutral stance, with inflation remaining within the RBI’s 2 per cent-6 per cent tolerance band and Malhotra signaling policymakers would act only if price pressures become more broad-based.    

 

Investors will look to Malhotra for signals on what could prompt future rate hikes and how the RBI plans to manage the rupee after easing rules to attract foreign-currency inflows. Many economists, including Santanu Sengupta of Goldman Sachs Group Inc. expect the RBI to begin raising rates in October.

 

Soumya Kanti Ghosh, chief economic advisor at State Bank of India Group and a member of the Prime Minister’s Economic Advisory Council, is among a handful of economists predicting the RBI will remain on hold through the financial year ending in March.

 

Communicating that stance will prove challenging, however, given heightened global uncertainty, Ghosh said. “Oil volatility, rupee pressure, external-flow caution and higher inflation projections make an explicitly dovish message less likely.”

 

India’s retail inflation rate breached the RBI’s 4 per cent target for the first time in 17 months, accelerating to 4.38 per cent in June. Figures for July are due next week as signs emerge that price pressures may prove more persistent. 

 

The finance ministry last week issued its first official warning that inflation was broadening beyond food. The country’s largest consumer companies are also preparing a second straight quarter of price increases on products ranging from toothpaste to tires and paint, adding to signs that higher input costs are being passed on to consumers.

 

Financial markets are fully pricing in a hold this week. Interest-rate swaps imply about 75 to 100 basis points of future rate hikes, although markets have pushed expectations for most of those increases into next year, according to Tata Asset Management.

 

Malhotra is scheduled to announce the policy decision in a televised address at 10 a.m. in Mumbai. Here’s what analysts will be watching:

Growth-Inflation Outlook

Most economists expect the RBI to leave its inflation forecast unchanged at 5.1 per cent for the fiscal year ending March 2027. Growth estimates are also expected to remain at 6.6 per cent. Those projections, published in June, were based on an assumption that crude oil would average about $95 a barrel.

 

While Brent crude briefly touched $100 a barrel recently, it has averaged around $85 since the start of July. As a result, some economists, including those at Citigroup Inc. and Goldman, see scope for the central bank to lower its inflation forecast.

Markets

The rupee has rebounded as much as 3 per cent from its record low in May after the RBI and the government introduced measures to attract foreign capital. Over $40 billion has flowed into India since the central bank eased rules on foreign-currency deposits and overseas borrowing.

 

State Bank of India estimates the measures could attract $80 billion to $85 billion by December this year. Most analysts expect the RBI to absorb much of those inflows into its foreign-exchange reserves, limiting further appreciation of the rupee while supporting domestic liquidity. 

 

 

“The market remains cautious about geopolitical developments in the Middle East and is therefore likely to favor the shorter end of the curve over longer-dated bonds,” said Sameer Karyatt, executive director and head of trading at DBS Bank India. The bank expects the benchmark 10-year government bond yield to remain above 6.70 per cent. It was trading flat at 6.84 per cent on Tuesday.