Rbi: RBI unlikely to tinker with key rate this week

The monetary policy committee (MPC) will meet between August 8 to 10 to review the repo rate -the rate at which central banks lends to banks-which was raised by 25 basis points to 6.5% in February 2023. In the two MPC meetings that followed, the members voted for a pause. None of the economists are forecasting a rate cut in 2023, and they all expect rates to trend downward only next year. Besides rising prices, the MPC meeting comes soon after the US Federal Reserve, the European Central Bank, and the Bank of England raised interest rates to bring down inflation.
The central bank is also unlikely to ease liquidity, given the volatility in the foreign exchange market. The rupee has fallen to a two-and-a-half-month low, with the dollar gaining against major currencies last week.

“We expect the RBI to pause in the August policy. We are in for a prolonged pause as the seasonality of inflation should taper,” said Soumya Kanti Ghosh, chief economist at the SBI group, in a report. According to the report, there is likely to be no change in stance since its operational significance is negligible. Another economist with a public sector bank said that the RBI has been warning the market to brace for a spike in inflation, which has not only materialised but has been exacerbated by rising tomato prices. “The only reason the RBI is unlikely to hike rates is that the vegetable price hike is temporary, and second, the impact of the last hike in February would still be playing out,” he added.
“It is highly unlikely for the MPC to hike in the upcoming policy, but we cannot rule out this possibility completely, given that the RBI has sometimes surprised in the past by going against the consensus view of professional economists and market expectations,” said Kaushik Das, chief economist at Deutsche Bank.
According to Deutsche Bank’s forecasts, CPI inflation is likely to touch 6.7% YoY in July (July-Sep ’23 CPI average forecast at 5.8%), from 4.8% YoY in June, led by a sharp spike in vegetable prices, particularly that of tomatoes. However, CPI inflation is likely to stay around 5.2% excluding vegetables. “We expect the RBI to look through the recent jump in food inflation and take comfort from the falling core,” said Pankaj Pathak, fund manager, fixed income Quantum AMC.