The last time around when the Reserve Bank of India's monetary policy committee (MPC) met, prices of vegetables like tomato had skyrocketed, raising near-term inflation concerns. In that backdrop, the MPC left its benchmark repo rate unchanged at 6.50 per cent for the third consecutive time.
Now as the MPC meets again this week from October 4 to 6, there will be concerns around surging crude oil, even as vegetable prices have cooled. Brent crude prices crossed $96 per barrel last week, a worry for countries like India, which import a significant portion of the required oil.
The RBI has a mandate keeping CPI (consumer price index) inflation at 4 per cent, within a range of plus or minus 2 per cent. But, in recent times, a hawkish MPC, led by Governor Shaktikanta Das, has stressed on that 4 per cent target.
"Bringing headline inflation within the tolerance band is not enough; we need to remain firmly focused on aligning inflation to the target of 4.0 per cent," Das had said after the last MPC meeting.
Retail inflation hit a 15-month high of 7.44 per cent in July. While it declined to 6.83 per cent in August, it was still well above the target. Monsoon has also been patchy this year, with some regions experiencing low rainfall.
So, experts feel, the central bank will continue to maintain a pause as it assesses the current as well as near-term situation. A hawkish pause by the US Federal Reserve and the European Central Bank raising rates yet again in September will also weigh on the MPC's minds.
"The forthcoming RBI MPC meeting is set against a backdrop of growing domestic as well as external economic challenges. These domestic challenges encompass growing risks to consumption demand amid soaring food inflation, an uneven monsoon adversely affecting kharif crops, higher interest rates and rising global crude oil prices," said Rajani Sinha, chief economist at CARE Ratings.
Sinha further said that the RBI is likely to prioritise supporting economic growth, especially during the festive season, while remaining cautious on inflation and therefore will keep the policy rates unchanged.
Others share a similar opinion. "With sticky retail inflation and the US Fed's persisting hawkish stance, the RBI is likely to keep the repo rate (6.5 per cent since February 8, 2023) unchanged for the fourth successive time," said Manoranjan Sharma, chief economist at Infomerics Ratings.
Complex inflation management is necessary in these challenging times of globally synchronized slowdown, heightened geo-political tensions and oil prices rising among other things, he added.
Madan Sabnavis, the chief economist at Bank of Baroda, also feels the credit policy this time will most likely continue with the existing rate structure as well as policy stance of withdrawal of accommodation.
"Inflation is still high at 6.8 per cent, and while we do expect it to come down sharply in September and October, there is still some pessimism on Kharif output, especially relating to pulses, which has potential to push up prices further," he said.
But, as the inflation trajectory is downwards, a rate hike can be ruled out, although one may have to wait longer for the MPC to cut the repo rate, Sabnavis added.
Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, also flagged food inflation risks along with rising crude oil prices among concerns.
"The global environment is turning extremely volatile with increasing headwinds for emerging economies, amid increasing narrative of higher rates for longer as US growth remains resilient and inflation faces upside risks. The US dollar and bond yields have been on an uptrend. Narrowing interest rate differentials to record low levels poses severe financial instability, thereby warranting a cautious approach by the RBI," said Bhardwaj.
Therefore, the RBI may maintain a hawkish pause and further prefer to keep short-term rates elevated in the near-term using liquidity measures given the underlying inflationary risks and the pressure on rupee, she added.