Experts predicted on Tuesday that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will continue to be wary of inflationary trends and would decide not to adjust the repo rate.
The rate at which the RBI lends money to banks is known as the repo rate.
On the RBI’s position, they differ in their opinions, though.
According to credit rating company CARE Ratings, on Thursday the MPC is anticipated to keep the policy repo rate unchanged.
In a study, CARE Ratings stated that “the stance is anticipated to remain at ‘withdrawal of accommodation’, with the policy repo rate held at 6.5 per cent.”
The main factors influencing this choice are threats to the inflationary forecast. The MPC will probably exercise caution and keep an eye out for any new inflationary threats even though the overall growth rate is predicted to be strong.
CARE Ratings states that even though the monsoon has been above average thus far (as of August 4, 6.4% over the Long Period Average), the first half of the monsoon season has had extremely unequal rainfall, which raises the overall risk of food inflation.
According to CARE Ratings, major agrarian regions in North and East India, including Punjab, Haryana, and the Eastern Gangetic Plains, continue to experience double-digit rainfall deficits despite the Southern states seeing decent rainfall.
As of August 2, the amount of food grains sown during the Kharif season is 5.7% more than the same period in the previous year, but it is slightly less than that of 2022. According to CARE Ratings, the amount of land planted in all three major food categories—cereals (4.5%), pulses (10.9%), and oilseeds (3%)—remains greater than it was the previous year.
In addition to the dangers associated with food inflation, recent telecom pricing increases by major mobile service providers, which range from 10 to 25 percent, will drive core inflation higher.
Approximately 2.1% of the total Consumer Price Index (CPI) basket and 4.4% of core inflation are attributed to telecommunication services.
Inflation estimates will also be slightly impacted by the recent hikes in sales taxes on fuel prices in a few jurisdictions. Furthermore, the major state-owned retailers’ higher revision of the rates for commercial cooking gas and aviation turbine fuel (ATF) may have second-order implications on the CPI.
Additionally, the credit rating agency anticipates that the RBI would stick to its 7.2% growth forecast for FY25.
On the other hand, Union Mutual Fund’s Head of Fixed Income, Parijat Agrawal, views the RBI’s position differently.
“Monsoon concerns have diminished and inflationary pressures have decreased. It appears that the fiscal consolidation has provided the necessary consolation as it proceeds along the glide route. We anticipate that the policy will be more dovish in light of the recent deterioration in the world economy and the volatility of the financial markets. We anticipate that the policy rates will stay the same; however, the Monetary Policy Committee may adopt a neutral position, according to Agrawal.
Aditi Gupta, an economist at Bank of Baroda, said the MPC would maintain its “withdrawal of accommodation” approach while also holding the repo rate same.
By the way, the monetary policy’s position was last modified in June 2022. This is because, according to Gupta, the increased levels of food inflation in recent months are unlikely to make the RBI comfortable.
However, the robust domestic economic impulse allows the RBI to maintain current rates until it is satisfied that inflationary pressures have decreased on a long-term basis.
Experts predict that depending on inflation and the state of world politics at the end of the year, the RBI may decide to implement a modest rate drop.
On Thursday, the MPC will make its verdict public.
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