India's Monetary Policy Committee may continue its 'status quo' on the key lending rate amidst a modest uptick in inflation and resilient growth.
All 37 economists polled by Bloomberg expect the MPC to maintain the 'status quo' on the RBI's repo rate on Thursday. The benchmark policy repo rate is currently at 6.50%.
"We maintain our view that the RBI MPC will keep the policy repo rate 'unchanged' in the Aug. 10 policy meeting at 6.50%, continue with hawkish guidance, and reiterate the 4% headline inflation target," Goldman Sachs said in a note.
The RBI will also likely continue with its stance on withdrawal of accommodation, given the relatively hawkish tone of the June MPC minutes, and would align with the stance to achieving the inflation target over the medium term, Rahul Bajoria, chief economist at Barclays said.
CPI Inflation
The country's retail inflation rose to 4.81% in June, compared with 4.3% in May, led by a rise in food prices. Food and beverage inflation rose to 4.63% during the month from 3.35% in May. To be sure, inflation remains within the central bank's medium-term target range of 4% plus or minus 2%.
In July, CPI inflation in July is likely to breach the 6% mark, led by food inflation, according to Suvodeep Rakshit, senior economist at Kotak Institutional Equities. Inflation is likely to inch up to around 7% in August, with some respite from Q3FY24, he said.
The surge in inflation is expected to be transient as it is led by vegetables—in particular tomatoes—which have multiple harvest seasons, according to a research note by IDFC First Bank. That said, the rise in food inflation represents an upside risk to the RBI's FY24 CPI estimate of 5.1%, the note said.
Given the transient and supply-led nature of the upward pressure on inflation, the RBI is expected to look through it and keep policy rates unchanged, Gaura Sen Gupta, economist at IDFC First Bank said. The key change to watch for would be MPC's assessment of the spike in food inflation and any potential revision to the FY24 CPI estimate, she said.
"We estimate the FY24 CPI inflation average at 5.4% with an upside risk, assuming a reversal in vegetable prices by September," said Sen Gupta.
Growth conditions have held up with a rise in listed company profits in Q1 FY24, both in the manufacturing and services sectors, Sen Gupta said. Recovery in the capex cycle remains supported by government expenditure, and urban demand continues to support consumption. The combination of elevated inflation and strong growth will keep the RBI in pause mode till at least December 2023, she said.
India 10-Year G-SecÂ
The yield on the benchmark 10-year government bond has risen since the last policy and is currently trading above the 7% mark.
Rupee
The rupee during the same period saw a modest depreciation while remaining largely range bound.
Banking Liquidity
Banking liquidity remained in surplus, rising to the tune of Rs 2.8 lakh crore by the beginning of August.
A Long Pause?
Goldman Sachs expects the RBI to look through the surge in food inflation by taking comfort from the declining core inflation to keep the policy repo rate unchanged in 2023 and continue with hawkish guidance.
In our view, fiscal policy will have to do the heavy lifting to control food inflation as India heads into election season with multiple state voting by late 2023, culminating with the national elections by mid-2024.Santanu Sengupta & Andrew Tilton, Goldman Sachs
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