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Published: June 3, 2023
Updated: June 3, 2023

RBI's MPC Meeting: A Status Quo Likely as Inflation Concerns Persist

With the upcoming Monetary Policy Committee (MPC) meeting of the Reserve Bank of India (RBI), analysts and experts believe that the central bank will maintain its pause on rate hikes. Despite India's retail inflation rate slowing to an 18-month low of 4.7% in April, the RBI remains cautious due to persistent inflation risks. Let's dive into the details and expectations surrounding the MPC meeting.

Inflation Moderation, Yet Concerns Remain:

April's retail inflation numbers fell within the tolerance band set by the RBI. However, Governor Shaktikanta Das stated that disinflation towards the target is expected to be slow and protracted, despite a potential softening in FY24. The central bank remains committed to fighting inflation and bringing it closer to the desired level over the medium term.

Tactical Pause, Not Policy Shift:

The RBI announced a pause in rate hikes in April, considering it as a tactical move rather than a policy shift. Governor Das emphasized that the central bank will continue to monitor economic developments and assess the evolving outlook. This suggests that any further rate cuts are unlikely in the near future.

Expectations of Rate Stability:

Barclays Securities anticipates the MPC to keep the repo rate unchanged at 6.5% in the June meeting. They project the RBI to maintain a hold on rates throughout FY24, given the expected decline in inflation and potential growth moderation due to external factors.

Risks to headline inflation, such as the possibility of El Nino and persistent core inflation from robust economic growth, may justify the RBI's decision to maintain the current stance.

Focus on Forecasts and Policy Stance:

Market participants will closely monitor the MPC's forecasts for CPI inflation and GDP growth for FY23-24. While a revision of near-term inflation projections is expected, the overall policy stance may remain unchanged. With high-frequency indicators reflecting solid domestic activity, a prolonged policy pause is foreseeable. The RBI's policy stance of "withdrawal of accommodation" may transition to a "neutral" stance in the absence of significant global risk events.

Balance of Risks and Prudent Approach:

Experts highlight the need for vigilance against potential risks, including rising crude oil prices, the possibility of El Nino-induced drought conditions, and unfavourable geopolitical developments. The easing inflationary pressure in India provides some breathing room for the RBI's extended pause on policy interest rates. However, prudence and careful assessment of the macroeconomic landscape will guide the central bank's decision-making process.

The RBI's MPC meeting is expected to result in a status quo on interest rates, reflecting the central bank's concern about inflation risks. While inflation has moderated, the RBI remains vigilant and committed to its mandate of maintaining price stability. External factors and global developments will also play a role in shaping the RBI's monetary policy stance.