Foreign Banks expect the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) to keep the benchmark repo rate unchanged at 6.5 percent in their upcoming October 7 - 9 meeting.
While they are anticipating a monetary stance change next month, the banks believe that the MPC meeting in December will see both a rate cut and stance change.
“We think the RBI will keep rates unchanged in October, but lower food and oil prices will likely lead to a cut in December,” Pranjul Bhandari, Chief Economist, India and Indonesia, HSBC Global Research said in a research note post the announcement of CPI inflation for August 2024.
The August Consumer Price Index inflation came in higher than expected at 3.7 per cent year-on-year. This was also higher than July’s 3.5 percent.
“With our expectation of falling food prices, and lower energy inflation, headline inflation could fall by December, and further by March 2025 towards 4 per cent ballpark,” Bhandari said.
“Rain check”
Meanwhile, Barclays Regional Economist Shreya Sodhani said in a research note that RBI is likely to remain cautious at the October MPC and keep rates on hold, waiting for monsoon season to play out fully and then assess effect on food inflation.
She highlighted that the surprise in August 2024 CPI print at 3.65 percent came from a smaller decline in food prices than expected, even as core inflation was stable and fuel CPI was in deflation.
“Taking August CPI data and early price indicators for September into account, we track CPI inflation for September at 5.1 percent year-on-year, as base effects reverse,” Sodhani said.
MPC in December
Barclays sees MPC doing a pivot in December. The MPC will likely want to get a clear picture of food supply following the end of the monsoon and the harvest seasons (October-November), Sodhani said in the research note.
Radhika Rao, Executive Director & Senior Economist, DBS Bank Group said in a research note that food was behind the upside surprise in August retail inflation.
She highlighted that the four-year term of the three external members in the MPC concludes next month and new Members might be named ahead of the October rate review.
Incoming members might prefer to maintain status quo, but follow a broader MPC shift in December as more inflation and growth prints become available.
Secondly, global monetary conditions are likely to get conducive as the US Fed is widely expected to deliver at least a 25 basis point cut this month, she added. Policymakers are likely to be guided by the Q2 GDP print, inflation in the interim and rupee stability, Rao noted.
The RBI has maintained the repo rate at 6.5 percent since February 2023. The central bank’s MPC has kept the repo rate unchanged for the ninth consecutive time in August.