RBI likely to keep interest rate unchanged at 6.5%, say experts

Mumbai: Reserve Bank of India (RBI) is likely to keep the key interest unchanged at 6.5 per cent on Thursday, and wait for more macroeconomic data before taking a call on rate cut in line with expectations, experts said.

The US Federal Reserve has decided to maintain a status quo on its interest rate for now and indicated there could be monetary policy easing in the coming months.

Amid persisting inflationary pressures, RBI will be closely tracking the US monetary policy trajectory before changing its stance on interest rate, which has remained unchanged since February 2023, experts opined.

The Monetary Policy Committee (MPC) may also refrain from rate cut as economic growth is picking up, notwithstanding the elevated interest rate of 6.5 per cent (repo rate).

The meeting of the Reserve Bank Governor Shaktikanta Das headed MPC is scheduled for August 6 to 8. Das will announce the decision of the rate-setting panel on August 8 (Thursday).

The central bank last hiked the repo rate to 6.5 per cent in February 2023 and since then it has held the rate at same level in its last seven bi-monthly monetary policy reviews.

"We do expect a status-quo position to be adopted by RBI in the forthcoming credit policy. Inflation remains high even today at 5.1 per cent and while this will come down numerically in the coming months, it will be more due to the base effect," said Madan Sabnavis, Chief Economist, Bank of Baroda.

He further said growth is on the stable path which means that the present interest rate situation does not militate against business.

"The RBI would rather wait and be sure that inflation is on the downward path on a durable basis before taking any action. While we do not expect any change in GDP forecast, there is a possibility of new guidance on inflation numbers," Sabnavis said.

Aditi Nayar, Chief Economist, ICRA, said that high growth in FY2024, combined with the inflation of 4.9 per cent in first quarter of the current fiscal are unlikely to shift the voting pattern of the four members who voted for a status quo in the June 2024 meeting towards a change in stance or rate cut in the August 2024 meeting itself.

"If the food inflation outlook turns favourable on the back of a normal distribution of rains in the second half of the monsoon season, and in the absence of global or domestic shocks, a stance change is possible in October 2024. This could be followed by a 25 bps rate cut each in December 2024 and February 2025, with an extended pause thereafter," she said.

Last month, Governor Das had said the question of change of stance on interest rate is quite premature given the gap between current inflation and 4 per cent target.

Pradeep Aggarwal, Founder and Chairman, Signature Global (India), too said that the central bank is expected to maintain the status quo on the interest rate for now as retail inflation continues to pose challenges.

"We hope central bank would shift towards a more supportive stance later.

"The likely change in stance, as and when it happens, would offer borrowers a sigh of relief, and housing loan offtake, which is showing early signs of moderation, would probably again start seeing the uptick. This shift, combined with achieving the 4.9 per cent fiscal deficit target, will benefit the overall economy, including real estate, and the sooner it happens, the better," Aggarwal said.

Puneet Pal, Head- Fixed Income, PGIM India Mutual Fund, also opined that the RBI would keep the rate unchanged.

"We think that the upcoming MPC policy's undertone may be relatively dovish given that fiscal consolidation is well on track with the fiscal deficit number printing below 5 per cent and the global monetary easing cycle well and truly underway with rate cut by Bank of England after the rate cuts from ECB and Bank of Canada," Pal said, and added the last US Fed meeting earlier in the week also had dovish undertones.

The MPC is entrusted with the responsibility of deciding the policy repo rate to achieve the inflation target of 4 per cent, keeping in mind the objective of growth.

The panel consists of three external members and three officials of the RBI.

External members of the rate-setting panel are Shashanka Bhide, Ashima Goyal, and Jayanth R Varma.

In an off-cycle meeting in May 2022, the MPC raised the policy rate by 40 basis points and it was followed by rate hikes of varying sizes, in each of the five subsequent meetings till February 2023. The repo rate was raised by 250 basis points cumulatively between May 2022 and February 2023.