India’s monetary policy committee is widely expected to keep key rates on hold when it announces its decision on Friday but the recent uptick in global crude oil prices and sustained economic growth are likely to keep its focus on inflation.
All but one of the 71 economists surveyed by Reuters in late September said the RBI would keep its key repo rate unchanged at 6.50% at the conclusion of the Oct. 4-6 meeting, with one expecting a 25 basis point hike.
“Even as the worst of inflation is behind us and core retail prices are on a downward journey, we would still expect the RBI to maintain a bit of hawkishness on inflation dynamics, given various uncertainties such as climate conditions, commodity prices and global risk positioning,” Yes Bank economists Indranil Pan and Deepthi Mathew said in a note.
Annual retail inflation in August was 6.83%, easing from 7.44% in July — a 15-month high — but remained well above the central bank’s 2%-6% comfort band.
The central bank has forecast inflation at 5.4% in 2023/24 but Deutsche Bank expects it to raise that view to 5.5-5.7% on Friday while keeping the GDP forecast unchanged at 6.5%.
High inflation has put the focus back on liquidity management amid the reduced ability to keep hiking rates at the risk of hurting growth and that is likely to continue at the upcoming policy review.
India’s economy grew at its quickest pace in a year in the April-June quarter, expanding 7.8% on year, buoyed by strong services activity and robust demand, but a five-year low monsoon rainfall could restrain future growth.
Analysts don’t expect the central bank to change its stance from ‘withdrawal of accommodation’ and expect to see continued measures to ensure the banking system liquidity remains tight without hurting economic growth.
“The bigger concern is if the RBI would opt for a CRR (cash reserve ratio) rate hike to tighten liquidity and improve transmission this time around – after introducing the Incremental-CRR in the last policy,” the HDFC Bank treasury desk said in a note.
“We think it is unlikely that the central bank would look at tightening liquidity through more permanent measures like CRR at this stage,” they said, adding they expect more fine-tuning of variable rate repo and reverse repo operations to manage liquidity.
With U.S. interest rates expected to remain higher for longer, market participants are pushing rate cut bets from the RBI to the second quarter of 2024.
Median forecasts in the Reuters poll, too, showed the repo rate staying at 6.5% for the rest of this fiscal year, with the next move being a 25 basis points cut before July.