RBI MPC meet: Repo rate likely to remain unchanged; liquidity tightening stance may be retained

The Reserve Bank of India's monetary policy committee (MPC) last met in April. At that time, contrary to expectations of another repo rate hike, it surprised all by leaving the rate unchanged. Since then, consumer inflation has cooled and GDP growth has surprised on the upside. This should give more comfort to the MPC, which began its three-day meeting on Tuesday, to maintain a status quo.

Between May 2022 and February 2023, the central bank raised the repo rate—the benchmark rate at which it lends money to commercial banks—by 250 basis points (2.50 per cent) from 4.0 per cent to 6.50 per cent as it looked to reign in rising inflation.

The central bank has an inflation target of 4 per cent, within a range of 2 per cent to 6 per cent.

Retail inflation was at 6.52 per cent in January and 6.44 per cent in February. In March, it fell below RBI's target band at 5.66 per cent. April CPI print was even lower at 4.7 per cent, an 18-month low.

While inflation seems well under control, the economy is also on a relatively firm footing. India's GDP grew 6.1 per cent in the January-March quarter, significantly higher than the 4.4 per cent growth recorded in October-December. For the full year 2022-23, GDP grew 7.2 per cent.

While GDP growth in the last quarter was strong and inflation is under control, the onset of monsoon has been delayed by a few days and there is still uncertainty on how the season will play out and if there will be any impact of El Nino this year. Against this backdrop, the MPC is likely to adopt a wait-and-watch approach.

"The RBI MPC will have gained confidence on both the inflation and GDP growth trajectory. A wait-and-watch would work best now with the stance remaining cautious," Suvodeep Rakshit, senior economist, Kotak Institutional Equities.

The World Bank, on Tuesday, lowered its 2023-24 GDP growth forecast for India by 30 bps to 6.3 per cent, but it will still be the fastest-growing major economy this year. The RBI had forecast a GDP growth of 6.5 per cent for the year. Rakshit doesn't expect any changes to the growth or inflation forecast by RBI this time around.

The upside surprise seen in the fourth quarter GDP number suggests that the economy is resilient even as private consumption expenditure remains on the slow track, noted Indranil Pan, chief economist at Yes Bank. According to him, a significant reason for the fall in the CPI is the high base of last year. He observed that price pressures continue to exist as is evident from 8.1 per cent month-on-month jump in vegetable prices for May. Still, he expects the overall softening bias in headline inflation numbers to continue.

"The evolving growth-inflation mix indicates a continued pause from the RBI in June," he said.

Arun Singh, chief global economist at Dun and Bradstreet, also feels the easing of inflationary pressure is creating some space for RBI for an "extended pause" in the policy interest rate.

"However, it is important to remain vigilant against potential risks from an increase in crude oil prices, the probability of El Nino creating drought conditions and unfavorable geopolitical developments," said Singh.

Santanu Sengupta, India economist at Goldman Sachs, also feels there is some risk to food inflation, partly stemming from crop damages due to unseasonal rainfall in parts of the country.

Still, headline inflation in the April-June quarter is also likely to be 50 bps below RBI's forecasts. Also, he sees headline inflation averaging 5.3 per cent in calendar year 2023, which is well within RBI's inflation target.

"With Q2 calendar 2023 headline inflation likely to be around 50 bps below the RBI's most recent set of forecasts, we maintain our baseline view that the RBI will likely keep the policy repo rate unchanged at 6.50 per cent," said Sengupta.

The Reserve Bank recently announced the withdrawal of Rs 2,000 denomination currency notes. So the system liquidity is expected to remain flush as these notes get deposited in banks, he pointed out. Elsewhere, equity markets have seen inflows of over $8 billion in the last three months and foreign exchange reserves have increased by around $33 billion.

Given this and the continued uncertainty on global growth and commodity price movements, Sengupta feels the RBI will retain the liquidity tightening stance as signaled by its earlier comments that the MPC will "remain focused on withdrawal of accommodation to ensure the inflation remains within the target going forward, while supporting growth."