The Reserve Bank of India (RBI) may hold interest rates at its monetary policy committee meeting scheduled for this week, investment banks and credit rating agencies said.
In its last meeting in December, the RBI’s six-member monetary policy committee had kept the policy repo rate unchanged at 6.5%, driven by looming risks of food inflation.
This week, RBI is expected to weigh a temporary spike in food inflation and remain cautious, given the continuing global supply side disruptions in the wake of attacks in the Red Sea and the overall crisis in the Middle East.
Rating firm CRISIL said the inflation print of 5.7% in December was driven solely by volatile vegetable prices and stubborn foodgrain inflation. However, the spike in prices will keep RBI cautious on rates as it eyes the 4% target.
This year, global growth is expected to slow and the impact of the RBI rate hikes on domestic demand will play out, CRISIL said, adding that in the US, the Federal Reserve is expected to cut rates this year, but a strong labor market data and higher-than-expected inflation have cast doubt on the timing and extent of the rate cuts.
Federal Reserve Chair Jerome Powell said in an interview aired on CBS on Sunday that the US central bank is likely to cut interest rates only after March.
Similarly in India, analysts see the rate cuts happening only later in the year.
“We expect RBI to keep the policy repo rate unchanged until Q3 calendar year 2024,” Goldman Sachs said in a report released last week,
Goldman Sachs expects headline inflation to stick around 5.3% in January-to-March, driven by high food inflation, even as core inflation has declined below RBI’s target of 4%.
The central bank is also expected to continue with its hawkish guidance, reiterating its target of 4% inflation.
“While the financial markets will be closely watching the governor’s comments and the RBI’s actions on liquidity, we think that liquidity will continue to be actively managed by the RBI consistent with the monetary policy stance of ‘withdrawal of accommodation’,” Goldman Sachs’ Santanu Sengupta, Arjun Varma, and Andrew Tilton said in a research note.
Aditi Nayar, chief economist at credit ratings firm ICRA Ltd, said, “The CPI inflation is expected to moderate in FY25, although a well-distributed monsoon will be critical. We don’t expect any change in rates or stance in the upcoming review. Our baseline expectation is that the earliest rate cut could be seen in August 2024 with a stance change in the preceding review.”
Core inflation, which excludes food and energy prices to give a clearer view of long-term inflation trends, is expected to rise to 4.5% by mid-2024, up from the same time last year. This increase is due to higher costs for materials used in manufacturing.
Overall inflation, including all items, is predicted to stay at 5.3% for the first half of 2024, averaging out to 4.8% for the entire year, ICRA said in a report.
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