RBI MPC Meeting: Economists Explain Why Repo Rate Will Remain Unchanged at 6.5% Tomorrow

The RBI MPC will announce India’s interest rate decision tomorrow, August 8, which is the last day of its ongoing three-day meeting. According to economists, the RBI’s monetary policy committee is expected to keep the repo rate unchanged at 6.5 per cent on Thursday and is unlikely to cut the key policy rate before December 2024 due to upside risks to inflation, especially in the food basket.

RBI Governor Shaktikanta Das will present the August 2024 bi-monthly monetary policy statement at 10 am tomorrow, Thursday. The MPC is a six-member committee chaired by Das. It has kept the repo rate unchanged at 6.5 per cent in the last eight monetary policy reviews since February 2023.

“Food inflation risks continue to dominate in the near term. The RBI will be in no hurry to ease monetary policy given the headroom from robust growth in the backdrop of near-term inflation risks,” said Upasna Bhardwaj, chief economist of Kotak Mahindra Bank.

India’s CPI inflation rose to a four-month high of 5.08 per cent in June 2024 on the back of higher food prices. Inflation in the food basket rose to 9.36 per cent in June, against 8.69 per cent in May. It is the latest monthly data available. The CPI inflation data for July 2024 will be released on August 12.

Aditi Nayar, chief economist, head of research and outreach at rating agency ICRA, said, “Last year’s high growth print, combined with the inflation of 4.9 per cent in Q1 FY2025, is 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.”

The chief economist of ICRA added that she is not ruling out a stance change in October 2024, and a 25 basis point (bps) rate cut each in December 2024 and February 2025 followed by an extended pause.

This will happen if the food inflation outlook turns decidedly favourable on the back of a normal magnitude and favourable distribution of rainfall in the rest of the monsoon season, and there are no other shocks, either global or domestic, Nayar said.

Sandeep Vempati, an economist with the BJP, said “CPI for June 2024 printed over 5 per cent, primarily due to high food inflation of 9.36 per cent mainly driven by vegetables. Food has approximately 40 per cent weight in the CPI basket. Howecer, core inflation is stable and ruling below 4 per cent.”

He added that the RBI MPC is not likely to go for a rate cut on August 8, 2024, because inflation has to sustainably align to 4 per cent. The recent Union Budget has announced policy measures to improve the production of pulses, oilseeds and vegetables. Also, the monsoon is progressing well this year and Kharif sowing is higher than last year. “This should aid in reducing the food inflation during the course of financial year,” Vempati said.

India’s economic growth continues to be robust. It grew at a significant 8.2 per cent in the financial year 2023-24. The GDP is expected to growth an impressive 7-7.2 per cent in FY25, as expected by the RBI as well as Deloitte India.

Suman Chowdhury, chief economist and head (research) at Acuité Ratings & Research, said, “The headline CPI inflation was slightly higher than our expectations at 5.08% in Jun’24 as compared to 4.75% in May’24. This is the first time in four months that the CPI inflation print has seen a significant sequential rise, largely driven by the increased food inflation which stood at 9.4% YoY vs 8.7% YoY in the previous month. Vegetable prices have been particularly on fire (29.3% YoY) in June due to the continuing summer heat waves in some parts of the country.”

While the average CPI inflation in Q1FY25 has been less than 5% in line with RBI estimates, there is an upside risk on inflation in the subsequent quarters which will continue to keep RBI cautious, he added.

“Despite the likelihood of a Fed rate cut having increased for September 2024, we don’t expect any monetary easing measures from RBI till December 2024,” Chowdhury said.

Last week, the US Federal Reserve also kept its benchmark interest rate unchanged at 5.25-5.50 per cent. However, its Chair Jerome Powell also hinted at a rate cut in September. He said the reduction of policy rate could be on the table as soon as the next meeting in September. However, it, according to Powell, will depend upon the jobs data and inflation trend.