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Published: September 25, 2023
Updated: September 25, 2023

RBI Expected to Maintain Interest Rates Amid Lingering Inflation Concerns

The Reserve Bank of India (RBI) is poised to keep its policy rates unchanged for the fourth consecutive time, in light of persistently high retail inflation and the US Federal Reserve's hawkish stance. The upcoming Monetary Policy Committee (MPC) meeting, led by RBI Governor, is scheduled for October 4-6, 2023.

Inflation Continues to Hold Steady:

The RBI raised the benchmark repo rate to 6.5% on February 8, 2023, and has since maintained this rate due to the stubbornly high retail inflation and global factors, including elevated crude oil prices.

Expert Opinions:

Madan Sabnavis, Chief Economist at Bank of Baroda, anticipates the RBI to maintain the status quo due to high inflation and tight liquidity. The RBI's inflation forecast suggests that it will remain above 5% in Q3 and likely into Q4.

Crop Uncertainties:

Sabnavis points out uncertainties surrounding the Kharif crop, especially pulses, which could further impact prices. However, there is less concern about economic growth, which appears to be on target.

Inflation Figures:

While the Consumer Price Index (CPI)-based retail inflation eased slightly to 6.83% in August from 7.44% in July, it still exceeds the RBI's comfort level of 6%. The government has mandated the RBI to maintain inflation at 4% with a 2% margin on either side.

Predictions for Inflation:

Aditi Nayar, Chief Economist at ICRA Limited, expects headline CPI inflation to ease to 5.3- 5.5% in September 2023, with further reductions in the coming quarters. However, she highlights potential risks to food inflation due to uneven monsoons and low reservoir levels.

RBI's Projections:

The RBI has projected CPI inflation at 5.4% for 2023-24, with varying rates in different quarters. However, they maintain a balanced risk outlook.

Expectations for Policy:

Some experts, like Sanjay Bhutani of the Medical Technology Association of India (MTaI), suggest it may be time for the RBI to consider reducing interest rates to boost economic growth. However, this could be challenging given high retail inflation and the Federal Reserve's hawkish stance.

Changing Economic Environment:

Sandeep Bagla, CEO of Trust Mutual Fund, notes that the economic environment has evolved since the last MPC review in August. Resilient growth and rising inflation have prompted consideration of maintaining the status quo on repo rates.

RBI is expected to maintain its current interest rates due to ongoing concerns about high inflation and the global economic environment. The central bank will carefully consider various factors in its upcoming MPC meeting, with an eye on sustaining economic stability.