With a hawkish undertone, RBI-MPC may continue to retain the repo rate: Experts

With food inflation being their major food for thought this time around, the members of Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) may not tinker with the repo rate at their upcoming meeting but the pause would be hawkish, said experts.

They also said there are factors other than monsoon that influence inflationary trends and the increase in input prices for the manufacturing sector is a cause of concern.

“A hawkish pause is widely expected and is already a part of the market psyche. The bond market will take cues from the RBI’s assessment of the current spike in food prices and its impact on the overall inflation outlook and monetary policy,” Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC.

Pathak expects the RBI to remain on hold and maintain its policy stance as a withdrawal of accommodation. They might raise their consumer price index (CPI) inflation forecast for FY24 by 20-30 basis points to around 5.3 per cent-5.4 per cent.

On her part, Chief Economist of CARE Ratings, Rajani Sinha told IANS that RBI will follow a wait and watch policy and will not change the repo rate but the undertone will be hawkish.

“While the recent increase in food inflation is more than the seasonal effect seen in previous years, the rise is likely to be transient in nature. The spatial distribution of rainfall so far has been skewed, however, the sowing of most Kharif crops (except for pulses) has been higher than last year.

"The other comforting factor is that WPI (Wholesale Price Index) index is contracting, implying that it will have a moderating impact on CPI (Consumer Price Index) with a lag. Hence the RBI is likely to follow a wait and watch policy,” Sinha said.

She also said with resurfacing of inflationary concerns, the RBI will remain cautious, keeping the window open for further rate hikes if required.

While the US Federal Reserve has again hiked the policy rate and Central Banks of other advanced countries are also doing so, the RBI has already made it clear that their decision will be influenced more by domestic growth and inflation dynamics.

The decision to maintain status quo on policy rate is likely to be unanimous amongst the MPC members, Sinha said.

According to Dipti Deshpande, Principal Economist, CRISIL Ltd the inflation appears to be transitory emanating from weather-related disturbances.

“Amid already high inflation rates for certain food items this could lend an upside to the inflation outlook. However, for now, we retain our CPI inflation forecast at 5 per cent for fiscal 2024. We expect RBI to keep rates and stance unchanged in the forthcoming policy. Rate cuts are expected in the March 2024 quarter,” Deshpande told IANS.

Not only are the prices of food items going up but also the input for the manufacturing sector.

Suman Chowdhury, Chief Economist and Head of Research, Acuite Ratings & Research in a report on the Purchasing Managers’ Index (PMI) for July said as per the respondents’ feedback there has been a resumption of rise in input prices and this could gain further strength if food and oil prices are to rise further in the next few months.

Regardless of growth in food production and monsoon being normal or above normal, inflation remained a worry during the past five years.

“The August meeting of the MPC will be the third successive one since April 2023 when the benchmark interest rate will be on hold at 6.5 per cent,” Chowdhury told IANS.

The current global scenario with persistent geo-political and heightened climate risks (impact of El Nino in particular) is likely to induce the “higher (rates) for longer” stance among the major central banks including RBI, Chowdhury said.

“The risks of a resurgence in oil and food prices along with resilient domestic demand and the relatively sticky core inflation levels may not permit any hasty pivot in monetary policy in the current calendar year. We forecast the benchmark repo rates in India to remain at the current levels till Q4FY24."

While Chowdhury expects the MPC decision to be unanimous he added that the debate on the language of the stance will continue as to whether RBI should transition from the “withdrawal of accommodation” to a “neutral” position.

“While there will be differences of opinion among the MPC members on this matter, we believe that the monetary policy stance will likely remain unaltered given the increased uncertainty on the inflation scenario."

“Even as the monsoon has turned normal this year, it is important to remember that food inflation was high in three of the past four years of normal monsoon. Extreme weather events, even if brief, can cause wild food price swings, especially for vegetables, CRISIL said in a report.

“Government policies and geopolitical developments are increasing their influence on domestic inflation in recent years. Hence, a wider set of factors in addition to the monsoon’s progress need to be taken into account to assess inflationary pressures in the economy,” Crisil said in its recent Market Intelligence and Analytics report.