Experts foresee no change in RBI’s 6.5% interest rate

Rate cut expectation: The Reserve Bank of India (RBI) is anticipated to keep its key interest rate steady at 6.5 per cent during its upcoming meeting, awaiting additional macroeconomic data before considering any adjustments, experts suggest.

In light of recent decisions by the US Federal Reserve to hold its interest rates steady and the potential for future monetary policy easing, the RBI is expected to maintain its current stance. The central bank has held the interest rate unchanged since its last hike in February 2023, amid ongoing inflationary pressures.

Rate steady anticipated

The Monetary Policy Committee (MPC), led by RBI Governor Shaktikanta Das, is scheduled to meet from August 6 to 8, with an announcement on the rate decision expected on August 8. Despite the economic recovery and the steady 6.5 per cent repo rate, the MPC is likely to pause on rate cuts for now.

According to Madan Sabnavis, Chief Economist at Bank of Baroda, "The RBI is likely to maintain the status quo in the upcoming policy review. Inflation remains high at 5.1 per cent, and while a decrease is anticipated in the coming months, it will largely be due to base effects. The RBI is expected to wait until inflation trends downward consistently before making any changes. New guidance on inflation may be provided, but GDP forecasts are unlikely to change."

Aditi Nayar, Chief Economist at ICRA, adds that despite high growth in FY2024 and a first-quarter inflation rate of 4.9 per cent, a shift in the MPC’s stance or a rate cut is improbable in the August meeting. However, if food inflation improves and no significant domestic or global shocks occur, a rate cut might be considered in October 2024, with potential cuts in December 2024 and February 2025.

Future supportive shift expected

Governor Das had previously indicated that changing the interest rate stance was premature given the gap between current inflation and the 4 per cent target. Pradeep Aggarwal, Founder and Chairman of Signature Global (India), also expects the RBI to maintain the current rate. He believes that a future shift towards a more supportive stance would benefit borrowers and the housing sector, provided it occurs alongside fiscal deficit targets.

Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund, shares the view that the RBI will likely keep the rate unchanged. He notes that the MPC’s upcoming policy may reflect a dovish tone, influenced by global monetary easing trends and the recent dovish stance of the US Federal Reserve.

The MPC, composed of three external members and three RBI officials, is tasked with setting the policy repo rate to meet the 4 per cent inflation target while supporting economic growth. External members include Shashanka Bhide, Ashima Goyal, and Jayanth R Varma. The MPC has previously raised the repo rate by 250 basis points cumulatively from May 2022 to February 2023.

(With PTI Inputs)