Repo Rate Unlikely To Be Changed By RBI MPC On August 8, Here's Why

The Reserve Bank of India’s Monetary Policy Committee (MPC) meeting commenced today, August 6. Led by Shaktikanta Das, the MPC will announce its decision on August 8 (Thursday).

The MPC is responsible for determining the policy repo rate to achieve the inflation target of 4 percent, while also considering the objective of growth.

In February 2023, the central bank last raised the repo rate to 6.5 percent and has maintained this rate in its subsequent seven bi-monthly monetary policy reviews.

In an off-cycle meeting in May 2022, the MPC raised the policy rate by 40 basis points and it was followed by rate hikes of varying sizes, in each of the five subsequent meetings till February 2023.

The repo rate was raised by 250 basis points cumulatively between May 2022 and February 2023.

RBI MPC Meeting August 2024: Expectations

Inflation To Be Focus

Aditi Nayar, Chief Economist, ICRA, said that high growth in FY2024, combined with the inflation of 4.9 per cent in first quarter of the current fiscal are unlikely to shift the voting pattern of the four members who voted for a status quo in the June 2024 meeting towards a change in stance or rate cut in the August 2024 meeting itself.

“If the food inflation outlook turns favourable on the back of a normal distribution of rains in the second half of the monsoon season, and in the absence of global or domestic shocks, a stance change is possible in October 2024. This could be followed by a 25 bps rate cut each in December 2024 and February 2025, with an extended pause thereafter,” she said.

Radhika Rao, Executive Director and Senior Economist, DBS Bank, also added that the uptick in June inflation validated the MPC’s cautious view on the trajectory of food costs, which is likely to extend into July-August.

“1QFY25 inflation averaged 4.9%, in line with RBI’s estimate, but the 2Q average is likely to be higher than the official forecast at 3.8%. Notwithstanding favourable base effects, the pullback in July-August inflation is poised to be shallower than expected on higher food, especially perishable costs, pulses and cereals, alongside the lagged impact of the adjustment in telecom tariffs,” Rao added.

MPC Action- Connecting the Dots

Dr. Manoranjan Sharma, Chief Economist, Informerics Ratings, hoped that the MPC’s stance will continue to be “withdrawal of accommodation” and the repo rate will remain unchanged for the ninth consecutive time.

Why Repo Rate Be Kept Unchanged?

Sharma said despite 7-8 % per cent steady growth in Asia’s third-largest economy, all is not well on the inflation front-not by a long shot.

“These concerns are manifested in inflation breaching the 5 % mark in June 2024 (five-month high of 5.08 % in June 2024) and persistently sticky food inflation despite continuously declining core inflation.”

Given heightened geopolitical dynamics, geoeconomic fragmentation and the RBI’s unequivocal mandate of monetary stability, which is characterised by moderate and stable inflation, there is a compelling need for caution and vigil on the inflation score. In other words, “if it ain’t broke, don’t fix it,” Sharma highlighted.

Sharma said the US Fed policy could have a lagged effect on the direction, pace and sequencing of the monetary policy events in India.

Rao too underlined that policymakers will monitor developments in the US Fed as markets price in a near-certain rate cut in Sep and US yields have corrected sharply amidst signs of cooling economic activity. The rupee has been less volatile but on a modest depreciating path in recent weeks, yet its YTD performance leaves it among the regional outperformers.