RBI likely to continue holding rates on inflation concerns: Experts

The Reserve Bank of India is likely to continue with the pause on the key interest rate in the upcoming monetary policy review amid inflation concerns and keeping the borrowing cost stable to maintain economic growth momentum, according to experts.

The six-member Monetary Policy Committee's (MPC) meeting will be held from August 8 to 10. The decision regarding the policy will be announced on August 10 by RBI Governor Shaktikanta Das.

The borrowing cost started rising in May last year and has been stabilised with the central bank keeping the repo rate unchanged at 6.5 per cent since February after it was raised from 6.25 per cent. In the two bi-monthly policy reviews in April and June, the rate was kept unchanged.

Factors considered 

Swarup Kumar Saha, Punjab and Sind Bank Managing Director said that the central bank factors in many things, including global developments. It will take into account interest rate hikes effected by several central banks, such as the US Fed, recently. Yields in domestic markets have gone down due to interest rate hikes.

"Looking at the overall situation, my guess is that the RBI would retain the repo rate at the present level. The interest rate is likely to be stable for the next 2-3 quarters if the global situation remains stable," Saha said.

Tribhuwan Adhikari, Managing Director of Housing Finance, too, said the RBI is unlikely to tinker with interest rates and will maintain the status quo in the upcoming monetary policy review.

He said that the interest rate is likely to remain stable in the near term.

Inflation threshold 

The government has tasked the RBI with keeping retail inflation at 4 per cent with a margin of 2 per cent on either side. The central bank factors in the CPI to arrive at its bimonthly monetary policy decision.

Indranil Pan, Chief Economist at Yes Bank, said that taking into consideration the domestic flare-up in vegetable prices led by tomatoes, there is likely to be no consideration from the MPC to make any alterations both to the rate and stance.

The decision would also be based on the continued firmness in the macro data flows from the advanced economies that are likely leading to uncertainties on the rate hiking cycle in the AEs, especially the US, Pan said.

"The India-US rate differential has fallen to historic low levels and may soon have implications for flows. We would expect the RBI to sound a bit cautious and therefore hawkish in its communication. Expectations are for the RBI to move higher in its own inflation projections for the remainder of the FY while keeping the growth estimates unchanged," Pan said.

India's retail inflation based on the Consumer Price Index (CPI) rose to a three-month high of 4.81 per cent in June, mainly on account of the hardening prices of food. The inflation, however, remains within the RBI's comfort level of below 6 per cent. The inflation data for July will be released on August 14.

On expectations from the MPC, Pankaj Pathak, Fund Manager, Fixed Income, Quantum AMC, said that since the last RBI policy, inflationary pressures have increased. Sharp jumps in vegetable prices have pushed expected inflation for the next 2-3 months above 6 per cent. Cereal and pulse prices have also moved up.

"We expect the RBI to remain on hold and maintain its policy stance as a withdrawal of accommodation. They might raise their CPI inflation forecast for FY24 by 2030 basis points to around 5.3 per cent-5.4 per cent. A hawkish pause is widely expected and is already a part of the market psyche," Pathak said.  

The last MPC meeting was held on June 6-8.

(With PTI inputs)