RBI may not change repo rate owing to food inflation

Chennai, Aug 6 (IANS) The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) will continue to remain cautious on the inflationary trends and may not change the repo rate, experts said on Tuesday.

Repo rate is the rate at which the RBI lends money to the banks.

However, there is a variance in their views with regard to the RBI’s stance.

Credit rating agency CARE Ratings said the MPC is expected to maintain the status quo on the policy repo rate on Thursday.

“The stance is anticipated to remain at ‘withdrawal of accommodation’, with the policy repo rate held at 6.5 per cent,” CARE Ratings said in a report.

This decision is primarily driven by risks to the inflationary outlook. Although the overall growth rate is expected to remain healthy, the MPC is likely to stay cautious and monitor any emerging risks to inflation.

According to CARE Ratings, despite an above-normal monsoon so far (6.4 per cent above the Long Period Average as of August 4), the overall risk of food inflation remains high due to highly uneven rainfall in the first half of the monsoon season.

Even though the Southern states have received good rainfall, key agrarian regions, particularly in North and East India, such as Punjab, Haryana, and the Eastern Gangetic Plains, continue to face double-digit deficits in rainfall, CARE Ratings said.

While Kharif sowing of food grains is 5.7 per cent higher than last year (as of August 2), it is marginally lower than the comparable period in 2022. Area sown under all major food categories — cereals (4.5 per cent), pulses (10.9 per cent), and oilseeds (3 per cent) — remains higher compared to the last year, CARE Ratings said.

Apart from food inflation risks, the recent hikes in telecom tariffs by major mobile service providers, ranging from 10-25 per cent, will put upside pressures on core inflation.

Telecommunication services account for about 2.1 per cent of the overall Consumer Price Index (CPI) basket and 4.4 per cent of core inflation.

The recent sales tax increases on fuel prices in a few states will also marginally impact inflation prints. Moreover, the upward revision of prices for aviation turbine fuel (ATF) and commercial cooking gas by major state-owned retailers can have second-order effects on the CPI.

The credit rating agency also expects the RBI to retain its growth projection of 7.2 per cent for FY25.

However, Parijat Agrawal, Head of Fixed Income at Union Mutual Fund, has a different take on RBI’s stance.

“The inflationary pressures have cooled off and monsoon worries have subsided. The fiscal consolidation seems to have given the required comfort as it follows the glide path. We expect the policy to have a dovish tilt taking cognisance of the recent weakness in the global economy and volatility in financial markets. We expect the policy rates to remain unchanged; the Monetary Policy Committee may change the stance to neutral,” Agrawal said.

According to Bank of Baroda Economist Aditi Gupta, the MPC will hold the repo rate steady as well as its stance, ‘withdrawal of accommodation’.

Incidentally, the stance of the monetary policy was last changed in June 2022. This is because the RBI is unlikely to be comfortable with the elevated levels of food inflation in the recent months, Gupta said.

On the other hand, the domestic growth impulse has been strong, giving RBI the room to keep rates at current levels until it has sufficient confidence that inflationary pressures have subsided on a durable basis.

According to the experts, the RBI may go for a small rate cut towards the end of the year depending on inflation and the geo-political situation.

The decision of the MPC will be announced on Thursday.

–IANS

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