RBI MPC expected to ‘pause and watch’ how inflation plays out

• India’s inflation outlook has changed in the last few months due to rising vegetable prices along with a few pulses and grains.
• While MPC is expected to increase its inflation projections it might not rush into a rate hike in August, economists say.
• While central banks of developed economies are still hiking interest rates, developed economies are actively decoupling.
  

Even those who aren’t keeping a keen eye on inflation would have noticed the surge in food prices in the last few months and their effect on Indian household budgets. However, economists believe that in the upcoming August meeting, RBI’s Monetary Policy Committee (MPC) is likely to keep base interest rates unchanged.

In the last few months, there have been many inflation shocks, especially with regards to rising tomato prices along with that of a few pulses and grains. According to a report by Crisil, the cost of a vegetarian thali went up by 28% and non-vegetarian thalis went up by 11% in July, as compared to June.

“Over the past month, surging food prices have changed India’s inflation outlook. While vegetable prices should eventually cool, pulse and cereal prices could prove stickier. We now expect headline inflation to rise to 6-6.5% in July/August, from 4.8% in June, before settling in a 5-6% range for the rest of FY24,” said Nomura.

‘Policy settings on hold’

Though prices are skyrocketing, most economists believe that the food inflation is transitory or seasonal. Moreso, core inflation has been steady and wholesale price inflation too has been cooling off, providing comfort. All these factors indicate that the MPC will keep interest rates paused like it did in the last two meetings.

“We expect the MPC to keep the repo rate unchanged at 6.5% at the 10 August meeting, flagging resilient economic growth, and anchored underlying inflation as reasons to monitor incoming economic data, while keeping policy settings on hold,” said Rahul Bajoria, MD & head of EM Asia (ex-China) economics at Barclays.

The RBI may not want to hurry to cut rates, says Deepak Jasani, head of retail research at HDFC Securities. “Inflation could remain elevated in July and August and if the El Nino pattern plays out in the latter half of the monsoon, this era of high inflation could continue till the end of this calendar. Oil prices globally have also started to inch up. However, we do not expect the RBI to jump the gun and resume rate hikes in its August meeting,” he added.

The MPC is also expected to maintain its status quo on its "withdrawal of accommodation" stance as well. However, economists do expect the RBI to alter its inflation projections for the year, while keeping growth projections intact.

“There are no new major headwinds to growth projections. Stronger than expected momentum in domestic investments resulted in major international agencies like IMF revising up India's growth projections to 6.1% from 5.9% earlier this year. We expect RBI to maintain its growth projections at 6.5% for FY24,” said a report by CARE Edge.

Mixed messages from global markets

While most nations across the globe had started increasing interest rates around May last year to tackle the global inflation problem — they have been coming off it in a varied manner. The world’s largest economy, the US, seems to be in the midst of more interest rate hikes. The US Fed hiked its policy rate by 25 bps last month, and experts expect a few more going ahead.

The Bank of England and European Central Bank are still hiking policy rates but a few central banks of emerging markets like China and Brazil have already started their rate-cutting journey. “Recent developments show early signs of a monetary policy decoupling globally influenced by different macroeconomic conditions,” says CARE Edge.

India however can go either way as the RBI Governor Shaktikanta Das has repeatedly said that it was a pause not a pivot in the earlier MPC meeting outcome. Most economists in India too had hoped for rate cuts in the second half of the current financial year, but quickly tempered their hopes after the change in inflation dynamics.

Along with a stable currency, large FPI inflows and narrowing trade deficit there are uncertainties like an erratic monsoon and El Nino conditions which may yet play out. In such a scenario, the Shaktikanta Das led panel will have to balance the growth momentum and yet stick to its mandated inflation watch. Tricky, to say the least.

MPC decisions in 2023

Meeting	Base rates
June meet	Rates kept unchanged
April meet	Rates kept unchanged
February meet	Rates hikes by 25 basis points to 6.5%