The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC) is anticipated to keep the repo rate, the key policy rate, unchanged at 6.5% in its upcoming meeting scheduled from August 6-8, 2024. This decision comes amid growing concerns over elevated food inflation, which poses a risk to the disinflation trajectory.
Market experts suggest that the MPC will maintain the monetary policy stance of “withdrawal of accommodation.” This would mark the ninth consecutive policy where the rate-setting panel has maintained the status quo. Goldman Sachs, in its report, stated, “We expect the RBI MPC to keep the policy repo rate unchanged at the August 8 meeting at 6.50 per cent, with a 4:2 vote in favor, retain the monetary policy stance of ‘withdrawal of accommodation’, sound relatively optimistic on growth, and continue to reiterate the commitment to the 4 per cent headline inflation target.”
In the June policy meeting, external members Ashima Goyal and Jayanth R Varma advocated for a 25 basis points (bps) reduction in the repo rate. Despite this, the overarching concern about rising food inflation has kept the rate steady. The headline inflation, measured by year-on-year changes in the all-India consumer price index (CPI), rose to 5.1% in June 2024 from 4.8% in May, driven primarily by food inflation which increased to 8.4% from 7.9% in the previous month.
Under the flexible inflation targeting regime, the RBI aims to maintain CPI within the 2-6% range and is targeting a durable reduction to 4%. Goldman Sachs highlighted that, despite a high base effect potentially pulling headline inflation towards 4% in Q3, the risk of uneven monsoons could exacerbate food inflation.
Impact on Lending Rates
If the repo rate remains steady at 6.5%, borrowers can expect relief as external benchmark lending rates (EBLR), linked to the repo rate, will not increase, stabilizing equated monthly installments (EMIs). However, lenders may raise interest rates on loans linked to the marginal cost of funds-based lending rate (MCLR), as the full transmission of a 250 bps hike in the repo rate between May 2022 and February 2023 has not yet occurred. Banks have already revised their repo-linked EBLRs upwards, and the 1-year median MCLR of banks increased by 168 bps from May 2022 to June 2024.
Future Outlook
Economists predict that the RBI will likely implement the first cut in the repo rate in December 2024, contingent on inflation dynamics and economic growth prospects. As the MPC convenes, all eyes will be on the RBI’s policy announcement on August 8, 2024, which will provide further insights into the central bank’s approach to navigating inflationary pressures and sustaining economic growth.
