RBI Expected To Keep Repo Rates Unchanged, Core Inflation Elevated

In its upcoming MPC meeting, we expect the RBI to keep the repo rate unchanged at 6.5%, continuing with a pause, as inflation, supported by statistical base has moderated, and will likely remain so. This provides enough support for the RBI to keep its key policy rate unchanged.

Additionally, inflation in other components, such as core inflation, which accounts for price pressures in households' products, has remained elevated albeit with a slight moderation in April 2023. High core inflation affects the discretionary spending of the households, which in turn leads to moderation in the overall consumption demand. This has already been witnessed in FY 2023 GDP growth. Although, the overall economy grew by 7.2%, the share of private consumption to GDP moderated to 60.6% in FY 2023 from 61.1% in FY 2022.

Thus, potential impact of the persistent price pressures on the domestic consumption growth will likely keep the RBI cautious enough to continue with a repo rate hike.

In terms of liquidity, the increase in net absorption by the RBI from Rs 603 bn in April 2023 to Rs 1.75 trn in May 2023, indicates excess liquidity in the banking system. Thus, we expect the withdrawal of accommodation through a moderate, i.e 25bps hike in Standing deposit facility (SDF).

In terms of real estate, the implication of the rate hike on home loan demand has been minimal so far. Residential demand has remained upbeat indicating at strong consumer preference towards home ownership despite high interest rate and inflation over the last one year. However, with economic growth facing headwinds from global slowdown, and the full impact of the high interest rates yet to be seen, we remain cautious of the impact on housing market."

(Shishir Baijal is the Chairman and Managing Director, Knight Frank India)