RBI Policy Preview: Repo Rate To Stay At 6.5% Fourth Time In Row, Little Room For Dovish Stance

The possibility of dovish remarks from the six-member Monetary Policy Committee (MPC) on October 6th is unlikely. Accordingly, RBI is expected to maintain the repo rate at 6.5% for the fourth consecutive policy, along with the 'withdrawal for accommodation' stance. A status quo is on the cards despite the consumer price index (CPI) easing sharply in the latest print since RBI is an inflationary trajectory central bank.

However the economic environment is challenging globally, and risks to inflation still persist which led major central banks like the US Fed, ECB and Bank of England to hold their key rates.

RBI is expected to follow the trend, and mostly have a 'wait-and-watch' approach to the policy.

Retail price inflation in India dropped to 6.83% in August, better than market forecasts of 7% --- which does come as a relief, especially after CPI touched a 15-month high of 7.44% in July due to a behemoth rise in prices of tomatoes and onions. However, inflation remains above RBI's tolerance limit of 2% to 6% for the second month in a row.

A poll conducted by GoodReturns between September 20-28 showed that the RBI will maintain a status quo in rates for the fourth consecutive policy after aggressively hiking rates by 250 basis points cumulatively from May last year until February 2023.

Markets have already dived sharply with Sensex falling below 65,300 levels, and Nifty 50 struggled to float over 19,400 when RBI's three-day meeting began on October 4th. The policy outcomes will be announced on Friday.

At present, the policy repo rate under the liquidity adjustment facility (LAF) is unchanged at 6.50%. Further, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

Here's what experts have said:

According to Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said global and domestic risks have increased from the August policy. Rising crude oil prices and the dollar are having an impact on the depreciating INR. With major developed market central banks seeming to be setting up for a long pause at elevated policy rates, the Reserve Bank of India (RBI) has very little space to sound dovish. The RBI will maintain the policy rate at 6.5% while aiming to keep liquidity tight.

Also, expecting a status quo, Jyoti Prakash Gadia, Managing Director at Resurgent India highlights three key pointers:

- RBI is expected to maintain a status quo in the forthcoming MPC meeting on Friday without any change in the repo rate. This continuation of the pause and a wait-and-watch approach by RBI is prompted by a complex set of circumstances, which indicate pressure on food inflation and uncertainties created due to unexpected monsoon challenges, while there is an overarching need to support growth. The chances of any increase in the near future will depend on the direction in which inflation pans out.

- The RBI is expected to continue with the existing stance of withdrawal of accommodation and not shift to a neutral stance as yet. The current growth inflation trade-off is emerging in a pattern that requires further inputs before making any change in the stance. Simultaneously the continued good monthly GST collections are indicative of a perceptible revival which needs to be suitably supported on a sustainable basis thereby postponing any interest rate increase or change in stance at this stage.

- The soaring inflation is primarily caused by food inflation due to supply side risk caused by uncertainties of monsoon which has not shown a favorable trend. The problem is likely to be further aggravated because of a new geopolitical situation emerging in respect of the Canadian issue, which will impact food inflation, particularly the supply of pulses.

Along similar lines, Dr Manoranjan Sharma, Chief Economist, Infomerics Ratings said, "With sticky retail inflation (6.83 % -August 2023, 7.44 % July 2023- trending downwards but still breaching the MPC's threshold of 6 %) and the US Fed's persisting hawkish stance, the RBI is likely to keep the Repo Rate (6.5 % since Feb. 8, 2023) unchanged for the 4th successive time. Complex inflation management is necessary in these challenging times- times of globally synchronized slowdown, heightened geo-political tensions, oil prices rising to $93 per barrel, surging debt levels and growing economic fragmentation- reminiscent of the Chinese curse "may you live in interesting times!"

Disclaimer:

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