- RBI expected to keep repo rate steady at 5.25% in upcoming policy meeting
- Inflation rise and future rate hikes remain key concerns for borrowers and markets
- Economists differ on timing of next rate increase, some predict October start
The Reserve Bank of India is widely expected to leave the repo rate unchanged at 5.25% on Wednesday, putting the focus on Governor Sanjay Malhotra's assessment of inflation and the conditions that could eventually push the central bank towards higher interest rates.
A pause would leave the policy rate unchanged for now, keeping the immediate interest-rate environment for loans broadly steady. For financial markets, however, the decision itself may be less important than what the Monetary Policy Committee says about inflation, crude oil, the rupee and the path for rates over the coming months.
All but one of the 30 economists surveyed by Bloomberg News expect the six-member MPC to keep the repo rate at 5.25%. Shilan Shah of Capital Economics is the only economist in the poll forecasting a 25-basis-point increase.
The committee is also expected to retain its neutral stance as inflation remains within the RBI's 2%-6% tolerance band. Malhotra has indicated that policymakers would respond if price pressures spread more widely through the economy.
Here are five things borrowers and financial markets will be watching in the August MPC:
Interest Rates And Loan EMIs
The first question for borrowers is whether the RBI sees a need to start raising interest rates after Wednesday's expected pause.
A decision to keep the repo rate unchanged would mean no policy-driven increase in borrowing costs from this meeting. The bigger issue is what happens next, particularly if inflation continues to rise.
Retail inflation accelerated to 4.38% in June, moving above the RBI's 4% target for the first time in 17 months. July inflation data are due next week.
There are also signs that price pressures are moving beyond food. The finance ministry last week warned for the first time that inflation was broadening, while consumer companies are preparing another round of price increases across products including toothpaste, tyres and paint as input costs rise.
That makes Malhotra's commentary on future rate increases important for borrowers. Any indication that the RBI is becoming more concerned about inflation could influence expectations for lending rates and, eventually, loan repayments.
When Could The RBI Raise Rates?
While Wednesday's decision is expected to be a pause, economists differ on how long the RBI can remain on hold.
Several economists, including Goldman Sachs' Santanu Sengupta, expect the central bank to begin raising rates in October.
Soumya Kanti Ghosh, chief economic adviser at State Bank of India Group and a member of the Prime Minister's Economic Advisory Council, is among economists who expect the RBI to keep rates unchanged through the financial year ending March.
The challenge for the central bank will be communicating its position while uncertainty over energy prices, currencies and global capital flows remains high.
“Oil volatility, rupee pressure, external-flow caution and higher inflation projections make an explicitly dovish message less likely,” Bloomberg reported Ghosh as saying.
Financial markets are already preparing for higher rates over a longer period. Interest-rate swaps imply about 75-100 basis points of increases ahead, although expectations for most of those moves have shifted into next year, according to Tata Asset Management.
Inflation And Growth Forecasts
The RBI's projections for inflation and economic growth will be another focus.
Most economists expect the central bank to retain its inflation forecast of 5.1% for the financial year ending March 2027 and its economic growth projection of 6.6%.
Those forecasts, released in June, assumed crude oil would average about $95 a barrel.
Brent crude briefly crossed $100 a barrel but has averaged about $85 since the beginning of July. Economists at Citigroup and Goldman Sachs see room for the RBI to lower its inflation projection as a result.
The balance between those oil prices and signs of broader domestic inflation could shape the central bank's guidance. A lower inflation forecast could reduce some concern over near-term price pressures, while warnings about persistent inflation could strengthen expectations for future rate increases.
Banking Shares And Bond Markets
The RBI's language on rates and liquidity will also matter for banking shares and the bond market.
For banks, investors will watch for signals on the future direction of borrowing costs and domestic liquidity. A prolonged pause would maintain the current policy-rate backdrop, while indications of earlier rate increases could change market expectations for the sector.
Bond traders are already cautious as the conflict in the Middle East keeps attention on oil prices and inflation.
“The market remains cautious about geopolitical developments in the Middle East and is therefore likely to favor the shorter end of the curve over longer-dated bonds,” Bloomberg reported citing Sameer Karyatt, executive director and head of trading at DBS Bank India.
DBS Bank India expects the benchmark 10-year government bond yield to remain above 6.70%. The yield was little changed at 6.84% on Tuesday, according to the report.
Rupee And Foreign Capital Flows
The RBI's approach to the rupee will be another part of Wednesday's policy to watch.
The currency has recovered as much as 3% from its record low in May after the RBI and the government announced measures aimed at attracting foreign capital. More than $40 billion has flowed into India since the central bank relaxed rules covering foreign-currency deposits and overseas borrowing.
State Bank of India estimates that the measures could attract $80 billion-$85 billion by December.
Analysts expect the RBI to absorb a large part of those inflows into its foreign-exchange reserves. Such intervention could limit further gains in the rupee while adding liquidity to the domestic financial system.
Investors will therefore watch Malhotra's comments for indications of how the central bank intends to balance currency stability, capital inflows and domestic liquidity.
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