RBI may maintain pause on interest rate as inflation declines: Experts

The Reserve Bank of India (RBI) will maintain the policy repo rate at 6.5 per cent during its upcoming June 8 announcement, considering the easing of retail inflation in April and the potential for further decline, indicating the effectiveness of previous policy rate actions, anticipate experts.

Headed by Reserve Bank Governor Shaktikanta Das, a meeting of the six-member Monetary Policy Committee (MPC) is scheduled for June 6-8. The decision of the 43rd meeting of the MPC would be announced on Thursday, June 8.

After the last MPC meeting in April, the RBI paused its rate hike cycle and stayed with the 6.5 per cent repo rate. Prior to that the central bank had cumulatively hiked the repo rate by 250 basis points since May 2022 in a bid to contain inflation.

The MPC is meeting in the backdrop of consumer price-based (CPI) inflation declining to an 18-month low of 4.7 per cent in April. The Reserve Bank governor recently indicated that the May print would be lower than the April numbers. The CPI for May is scheduled to be announced on June 12.

Madan Sabnavis, Chief Economist, Bank of Baroda, said the RBI is most likely to continue to pause on the interest rates and retain repo rate at 6.5 per cent.

“The reason is that inflation has come in lower than 5 per cent in April and will be even lower in May. This being the case, the view would be that past repo rate actions have had an effect on inflation and hence there can be another pause taken,” he said.

The policy stance, he added, will however remain with withdrawal of accommodation since there has already been an increase in liquidity as deposits increase due to the announcement of the exchange of the Rs 2,000 notes.

The RBI will also be monitoring the progress of the monsoon and the possible ill effects of El Nino which can affect the kharif harvest and hence impact prices, experts said.

“For the year, however, we see 25-50 bps cut in repo rate which will be post October only,” Sabnavis said.

The government has mandated the RBI to ensure CPI inflation at 4 per cent with a margin of 2 per cent on either side.

Bankers too expect that the central bank will continue its pause in the forthcoming policy.

“As far as bankers are concerned I would only say that RBI’s repo rate has already been increased 2.5 per cent. Expectations from the market or the banking side is that we do not expect that any rise in the repo rate would be there because already the interest rate has been raised by 2.5 per cent on the repo side and inflation is moderate,” Rajneesh Karnatak, Managing Director, Bank of India, told PTI.

He said the inflation is also moderate. “If you see the data of wholesale inflation and retail inflation, it is now moderate. I think there will be a pause from RBI and there will not be any increase in the repo rate,” Karnatak said.

Echoing his views, Bank of Maharashtra executive director Asheesh Pandey said RBI would continue its stance of wait and watch before tinkering with rate.

Keeping inflation, liquidity in the banking system and recent GDP number into consideration, it seems that RBI is likely to maintain pause as far as interest rate is concerned, Pandey added.

The actual decisions made by the RBI, experts said, will depend on various factors, including economic data, inflation trends, global economic conditions, and the prevailing challenges.

President of PHD Chamber of Commerce and Industry Saket Dalmia said that at this juncture, status quo by RBI will support the demand trajectory in the country and maintain GDP growth on high road.

“We congratulate the RBI that the effectiveness of policy rates have proven strong with an increase of 250 bps in repo rate, inflation has come down by 310 bps. The ERPR (Effectiveness Ratio of Policy Rate), the ratio of increase in repo rate and decrease in inflation is 1.24; means with an increase of 1 basis point in repo rate, the country was able to reduce inflation by 1.24 basis points,” he said.

On his expectations from the RBI, Ramnath Krishnan, Managing Director & Group CEO, Icra, said inflation readings have eased, suggesting that April’s surprise pause is likely to be extended further in June 2023.

“Growth surprised on the upside as well, ruling out early rate cuts. The market will keenly await cues on liquidity management from the RBI, including the impact that is foreseen from the Rs 2,000 notes coming back into the banking system,” he said.

The other members of the MPC are: Shashanka Bhide (Honorary Senior Advisor, National Council of Applied Economic Research, Delhi); Ashima Goyal (Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai); Jayanth R Varma (Professor, Indian Institute of Management, Ahmedabad); Rajiv Ranjan (Executive Director, RBI); and Michael Debabrata Patra (Deputy Governor, RBI). The meeting is chaired by RBI Governor Shaktikanta Das.