The Reserve Bank of India (RBI) is expected to maintain key interest rates as its monetary policy committee meeting continues. SBI Research predicts a pause in the key policy rates, with the outcome of the review meeting set to be announced on Thursday morning.
The RBI holds bi-monthly meetings, where it makes decisions on interest rates, money supply, inflation outlook, and macroeconomic indicators. The ongoing three-day meeting started on Tuesday.
During the previous meeting in June, the central bank’s monetary policy committee unanimously chose to keep the repo rate unchanged at 6.5 percent, in line with analysts’ expectations. The RBI had also paused the repo rate in its April meeting.
The repo rate is the rate at which the RBI lends to other banks.
According to a report by SBI Research, authored by SBI’s Group Chief Economic Adviser Soumya Kanti Ghosh, it is expected that the RBI will maintain its pause in the August policy. The report also noted a potential tapering of inflation due to seasonality, suggesting a prolonged pause in interest rates.
However, the report did not provide any forward guidance, stating that it is not advisable to do so in an environment of rising rates.
The central bank may have decided to pause key rates again due to the consistent decline in inflation, which is currently at an 18-month low and has the potential to further decline. While many countries, including advanced economies, have struggled with inflation, India has managed to control its inflation effectively.
Apart from the April pause, the RBI has raised the repo rate cumulatively by 250 basis points to 6.5 percent since May 2022 in an effort to combat inflation. Increasing interest rates is a monetary policy tool that helps reduce demand in the economy, thereby aiding in the decline of the inflation rate.
India’s retail inflation exceeded the RBI’s 6 percent target for three consecutive quarters before falling back within the RBI’s comfort zone in November 2022. Under the flexible inflation targeting framework, the RBI is considered to have failed in managing price increases if CPI-based inflation remains outside the 2-6 percent range for three consecutive quarters.
It remains to be seen whether the RBI committee will maintain the repo rate unchanged for the third time or make adjustments, particularly considering the uptick in inflation observed in June.
