RBI may keep policy rate unchanged this week

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) is widely expected to keep its policy repo rate unchanged at its meeting on Thursday, 8 August, while retaining its monetary policy stance of ‘withdrawal of accommodation’, according to analysts.

Soaring food inflation has driven up the headline inflation in the first half of the year to about 5%, above the RBI’s tolerance band, even as core inflation has continued to decline.

“Going forward, even though a high base last year is going to pull headline inflation down towards 4% in Q3, there are upside risks to food inflation due to an uneven monsoon,” Goldman Sachs said in a report.

“We expect the RBI MPC to keep the policy repo rate unchanged at 6.50%, with a 4:2 vote in favor, retain the monetary policy stance of ‘withdrawal of accommodation’, sound relatively optimistic on growth, and continue to reiterate the commitment to the 4% headline inflation target,” it said.

Meanwhile, growth signals have been mixed after the Indian economy grew in the April-to-June quarter at 7.8% year-on-year, against a Bloomberg consensus estimate of 7%, with analysts seeing muted urban consumption going forward even as rural activity is seeing nascent signs of a recovery.

“We expect the urban consumption to remain muted as personal credit growth declines given macro-prudential measures by the RBI on the growth in unsecured loans. The government has also prioritized fiscal consolidation in the FY25 final union budget, and government capex in Q1 FY25 has remained muted, even after the elections were over,” it added.

Liquidity in the banking system has eased over last month, which along with the RBI’s proposed changes to the liquidity coverage ratio for banks, have softened short-term rates.

“Separately, RBI imposed new curbs on the foreign ownership of government securities by excluding the newly issued 14-year and 30-year tenor securities from the Fully Accessible Route. The net result of these two measures has been a steepening of the yield curve,” it said.

To be sure, Indian government bonds eligible for index inclusion saw the highest-ever overseas inflows last week, suggesting RBI’s curbs on the securities have done little to dampen investor sentiment, Bloomberg reported on Monday, citing data collated from the Clearing Corp. of India.

The inflows come despite RBI last week moved to restrict access to new government bonds with 14-year and 30-year tenors. Authorities are wary about the billions of dollars of inflows tied to the inclusion of its debt in a key global index.

Different regulators, different strategies

The US Federal Reserve last week left its benchmark rate at the highest level in more than two decades, while adding that an interest-rate cut may come as early as September.

The US Federal Open Market Committee decided to leave the federal funds rate in the 5.25-5.5% range, a level they have maintained since last July.

Also last week, the Bank of England (BoE) on Thursday cut interest rates from a 16-year high following a tight vote by policymakers, who were split over the course of inflation.

BoE governor Andrew Bailey led the 5-4 decision to pare rates by a quarter-point to 5%, while stating that BoE will move cautiously going forward.

The decision of was the regulator’s first reduction since March 2020, during the beginning of the covid pandemic.

Meanwhile in Japan, the central bank last week raised its benchmark interest for only the second time in 17 years.

The Bank of Japan (BoJ) lifted its key interest rate to “around 0.25%” from the previous range of 0% to 0.1%.

The Japanese central bank, in its policy that came hours before the US Fed announced its decision, also outlined a plan to unwind its massive bond buying program as it exited a decade of stimulus measures.