Inflation may force RBI to hold interest rate, focus on liquidity Economists
By Venkatachari Jagannathan | 05 Dec 2024
The Reserve Bank of India’s (RBI) six member Monetary Policy Committee (MPC) is expected to hold the repo rate (the rate at which it lends to banks) at 6.5%, said top economists.
They also said the MPC would focus on the liquidity management.
According to them, the MPC’s decision may or may not be unanimous as the decision on the interest rate taken at its October meeting was not unanimous.
The six member MPC is having its meeting on 4-6 December 2024.
The ongoing inflationary pressures, more particularly the food inflation, will make the MPC maintain the existing policy rates. The Consumer Price Index (CPI) inflation reached a 14-month high of 6.2% in October. The continued price rise of vegetables, edible oils and pulses keeps the food inflation at higher levels, said Rajani Sinha, Chief Economist, CARE Ratings.
According to Sinha, there are indications of economic slowdown and hence MPC is likely to prioritise price stability by keeping the interest rate unchanged.
She said the central bank is expected to revise its gross domestic product (GDP) projection downwards to 6.5%.
Adding further Sinha said the RBI will revise upwards the inflation projection to about 4.8% for FY25.
Madan Sabnavis, Chief Economist, Bank of Baroda said the RBI’s MPC may not alter the repo rate as the last two inflation numbers are above 5%.
In its latest report "Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon” published on Monday S&P Global Ratings said: “While much of the region should be able to continue to grow solidly, central banks will probably remain cautious by not reducing their policy rates too fast. And risks have gone up,” the report notes.
The report also said the GDP growth for India will be at 6.8% this fiscal on the back of high interest and lower fiscal impulse temper urban demand.
S&P Global Ratings expects RBI to cut its interest rate only once in FY25.
According to CARE Ratings Sinha, the MPC may resort to a shallow rate cut of 25 basis points later only if the food inflation moderates.
She said the MPC would also look at the liquidity management at its meeting as the weighted average call money rate has risen sharply, nearing the MSF (marginal standing facility) rate, averaging 6.7%.
The higher forex interventions, seasonal fluctuations in currency circulation, have led to a reduction in systemic liquidity, said Sinha.
While the RBI has conducted Variable Rate Reverse Repo (VRR) auctions to support money market rates, it will be crucial to observe how the RBI plans to manage liquidity moving forward, Sinha added.
On the likelihood of MPC’s decision being unanimous Sinha said the 5:6 majority as to the policy repo rate decision is expected to persist unless Q2 GDP growth significantly underperforms market expectations.
At its October 2024 meeting, the MPC in a 5:1 vote, decided to hold on to the repo rate at 6.50 per cent. Dr Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi voted for reduction of repo rate by 25 basis points to 6.25%.
On the other hand, Bank of Baroda’s Sabnavis expects the MPC’s decisions to be unanimous as there is an uncertainty as to US policy action after January 2025 when a new government will take over.
Meanwhile Dr. Niranjan Hiranandani – Chairman, NAREDCO said a repo rate cut by 0.50 basis points will be crucial for economic growth.
It is a flawed understanding on the part of the RBI as to the underlying factors driving up the prices that high interest rates would curb food inflation, Hiranandani said.
According to him, supply side constraints influence food inflation and RBI can afford to lower the repo rate.
