RBI Monetary Policy Highlights August 2024: RBI keeps repo rate unchanged at 6.5%, FY25 GDP growth projected at 7.2%

Arsh Mogre, Economist - Institutional Equities, Prabhudas Lilladher:

RBI’s Inflation-First Approach: A Divergence from the Pack

“In its latest policy review, the RBI underscores a decisive focus on inflation control, starkly contrasting with the easing trends among major global central banks. This stance is not merely reactionary but a calculated alignment with long-term financial stability goals, given the disproportionate influence of volatile food prices on India’s CPI.

The RBI’s commitment to maintaining the repo rate at 6.50%, despite international rate cuts, signals a deeper strategy: fortifying the economy against inflationary pressures while cautiously monitoring growth indicators. This approach reflects a profound balancing act, poised between nurturing economic resilience and preempting inflationary spirals, thereby crafting a monetary path that prioritizes sustainable economic health over transient growth impulses.

This careful navigation suggests that any future rate adjustments will hinge on a sustained alignment of inflation closer to the target, integrated with robust economic data, rather than external monetary trends. The central bank has slightly adjusted GDP growth expectations while notably revising inflation forecasts upwards for the coming quarters. This recalibration indicates that the RBI’s strategic focus is on managing inflation without stifling economic momentum, particularly in a globally volatile environment.

The RBI is likely to maintain its policy stance until at least Q3 FY25, pending a sustained alignment of inflation toward the target. This cautious approach may be influenced by external factors such as potential aggressive rate cuts by the US Fed. “

Barclays: 

August MPC: Advocating patience; cuts still far away

The MPC kept the policy rate and its stance unchanged in a 4-2 vote. The statement was broadly unchanged, with the governor advocating patience and focusing on maintaining disinflationary policy. We continue to expect cuts from December, with updated quarterly inflation projections reducing the likelihood of an October cut.

Vishal Sharma, Cofounder & CEO of AdvaRisk (an ICICI Bank and NABARD backed Fintech):

“The RBI’s proposal to increase the frequency of credit information reporting to a fortnightly basis is a progressive step and will bring in more transparency and promote a healthy credit culture. Earlier, if a customer has availed a loan from multiple lenders, the reporting of it would be reflected in CIC only after a 30-day period. With the reduction in this timeline to 15 days, creditors would be able to monitor accounts of borrowers in a timely manner, ensuring faster risk assessment, better decision-making in terms of lending and over a period of time, reduction in default rates, contributing to the overall health of the economy. Overall, this measure will make the credit tracking system of a borrower more robust and will make the process of availing credit more seamless and secure, bringing in more stability in the lending ecosystem.”

Indranil Pan, Chief Economist at YES BANK:

Recent rumblings in the global financial markets and expectations for the US Fed to be aggressive in its rate-cutting cycle have failed to sway the RBI away from its views on how monetary policy needs to be conducted in India. I think the RBI was a tad more hawkish than in the previous MPC, probably to firmly establish in the minds of the market that it should not expect any rate cuts soon. In this context, the RBI clearly indicated that there is still a distance to cover to align inflation with the 4% target. RBI’s thought on the debate if it could be more suitable to target core rather than headline inflation indicates that for the MPC, food inflation remains important as it has a high share in the consumption basket of the public and that it could influence households’ inflation expectations. The RBI acknowledges that the financial sector in India is strong but stresses the need to proactively flag off the risks and challenges. For the RBI, a high CD ratio of the banking system had been of some concern, and it could be true that the RBI would want to see the CD ratio come down to more reasonable levels before easing monetary policy.

Achala Jethmalani, Economist, RBL Bank: 

A food for thought policy. In a 4:2 vote the MPC maintained a status-quo on policy rates and stance. With food basket having a weight of 46% in inflation, it cannot be completely ignored. More so, when the risk is due to the nature of food inflation which has been more persistent than transitory. The weight to the thought of tracking inflation excluding food or looking at core inflation was reduced. The proactive liquidity management has kept liquidity conditions benign, and a pivot to easy policy is still a couple of quarters away. The majority of MPC has reiterated on its 4% inflation target and for the banking sector, the Governor (re)emphasised on deposit mobilization as deposit growth has been trailing credit growth. Overall, with the growth forecast of 7.2% YoY and inflation forecast of 4.5% for FY25 the MPC is not seen in a hurry to pivot to cuts in CY24. We still see first rate cut to come through in Q1 CY25.

Shishir Baijal, Chairman and Managing Director, Knight Frank India on RBI MPC Meeting:

Stable policy interest rate to support homebuyer sentiment

“In line with expectations the RBI continues to maintain policy repo rate at 6.5%, especially considering the inflationary pressures, which is driven by persistently high food prices. Given that the system-wide liquidity is in surplus, by holding the rate steady the RBI seeks to mitigate inflation without stifling economic momentum. This decision underscores the RBI’s commitment to ensuring long-term price stability while fostering a conducive environment for sustainable economic growth. While some high frequency indicators indicate some moderation in growth it is encouraging that the central bank is confident of 7.2% GDP growth for FY25.

The decision to keep policy rates unchanged is particularly beneficial for the real estate sector, as stable interest rates mean that borrowing costs for homebuyers and developers remain constant, encouraging further investments in property. This stability will foster confidence among potential homebuyers, and support ongoing residential sales momentum and boost housing demand, contributing to the sector’s growth.

The RBI is closely monitoring global geopolitical tensions and economic volatility, which continue to pose significant risks to the global economy. Heightened geopolitical risks, such as ongoing conflicts and trade tensions, have led to increased market volatility and uncertainty. These factors further justify the need for a cautious monetary policy stance to safeguard India’s economic stability.”

Rahul Jain – CFO, NTT DATA Payment Services India on enhancing transaction limit for tax payments through UPI: 

The Central Bank’s announcement to increase the transaction limit to Rs 5 lakh for tax payments using Unified Payments Interface (UPI), from Rs 1 lakh earlier is a significant move, propelling India towards digitally inclusive economy. This initiative will strengthen the tax-collection system, reduce the cost of tax-collection, and make tax-payments more convenient for taxpayers. This also means more benefits to taxpayers in terms of seamless, transparent, secured, and ease of making high value transactions.

Comment on Introduction of ‘Delegated Payments’ through UPI

Allowing Delegated Payments can be a pivotal step in expanding the userbase of Unified Payments Interface (UPI). Through this development, two family members can now use one bank account for making UPI payments. While we wait for more details, this initiative will further strengthen and enhance UPI payments especially in rural areas, where financial literacy is less, and one bank account is used by one family. This mechanism will enhance user convenience by ensuring effective control through the usage limit authorization feature. This will also empower consumer confidence with easy, safe, and hassle-free financial transactions, thereby contributing towards a digitally empowered nation.

Rajesh Kumar, MD & CEO, TransUnion CIBIL on increased frequency of reporting credit information:

“This is a very progressive move which will significantly strengthen the credit information ecosystem. With more frequent data reporting by banks and credit institutions, CICs will be able to update credit records faster and this will translate into more updated data being available for making informed lending decisions by credit grantors. This will also help in resolving consumer disputes faster based on updated data in the credit records. Credit information solutions help create economic opportunity for millions of people in India, and we take our responsibility to deliver accurate data very seriously. As India’s pioneer credit information company, we work constantly to strengthen the credit information ecosystem for the public good.”

Flood impact on inflation will be temporary, he said. 

We work with law enforcement agencies to identify mule accounts, said RBI Deputy Governor Swaminathan. Most banks have systems in place to identify illegal bank accounts that are used for fraudulent activities, said RBI Governor Shaktikanta Das. 

Risk weights have been brought back to normal levels, they had been reduced during Covid, he said. 

The Government has been taking measures to improve supply-side measures including food, he added. 

Dealing with those entities bilaterally who are flouting prudential norms in home equity loans, he said. 

Banks should mobilise deposits within the regulatory parameters, not go to extreme measures, he said. Banks should not go out of way to mobilise deposit, he added.

Mismatch between bank deposits and credit growth may create liquidity management issues, he said. I am not suggesting that people should put more money into banks, he added.

During Covid, it was high but there has been a drawdown, he said. Physical savings is going up, he added. 

CPI basket needs a review and has been delayed due to Covid, he said. 

The weight of India in the bond index will rise over a 10-month period, he said. 

The neutral rate shows that the current policy rate is exactly right, he said.

It is for banks to take decisions on higher deposit rates, he said. It is deregulated, he added.

We have only suggested that banks should use their branch network and be innovative on mobilising funds, he said.

It is not correct to say we have increased the liquidity coverage, he said

US unemployment data is just of one month, cant speculate about recession, slowdown based on one month’s data, he said. 

It would be premature to talk about recession in the US, he said. 

Sonal Verma, Managing Director, and Chief Economist (India and Asia ex-Japan) at Nomura:

“Even though the stance is unchanged, we think it is a neutral hold. The downgrade to Q1 GDP (from 7.3% to 7.1%) due to weak high frequency data was a surprise to us, since the RBI has so far been raising its growth forecasts, so it is acknowledging softer numbers incrementally. On inflation, the near-term upward revision has been offset by downward revision to Q4, implying the food price shock is seen as transitory. Our estimates show that the RBI’s upward revision to Q2 CPI (from 3.8% to 4.4%) may not materialise, since food prices are already reversing in August, so inflation may surprise lower relative to the RBI’s near-term forecast. We expect the RBI to begin its easing cycle from October with a 25bp cut, as both inflation and growth surprise on the downside. Past evidence suggests the RBI does not offer any forward guidance ahead of its monetary policy pivots. We expect 75bp worth of cumulative easing in this cycle to a terminal repo rate of 5.75% by March 2025.”

Shishir Baijal, Chairman and Managing Director, Knight Frank India:

Stable policy interest rate to support homebuyer sentiment

“In line with expectations the RBI continues to maintain policy repo rate at 6.5%, especially considering the inflationary pressures, which is driven by persistently high food prices. Given that the system-wide liquidity is in surplus, by holding the rate steady the RBI seeks to mitigate inflation without stifling economic momentum. 

The decision to keep policy rates unchanged is particularly beneficial for the real estate sector, as stable interest rates mean that borrowing costs for homebuyers and developers remain constant, encouraging further investments in property.

Shanti Ekambaram, Deputy MD, Kotak Mahindra Bank, and Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

“The MPC’s decision to maintain status quo on policy rates and stance underscores their commitment to managing inflation and ensuring price stability. With food inflation contributing 46% of the total inflation basket, it’s critical to address this to prevent spillover risks to core inflation. Growth remains resilient, with steady urban consumption, emerging rural demand, stable manufacturing, and buoyant services growth projected over the next three quarters. The expectation of a normal monsoon further supports stability in agriculture.

In light of global financial market volatility, divergent stances by central banks worldwide, resilient domestic growth, and higher food inflation, the MPC’s decision to keep rates unchanged is prudent. The MPC’s focus on maintaining price stability and targeting sustainable inflation of 4% is clear. Seems like we must remain patient regarding any potential changes in stance or rate cuts.”

Amit Bhagat, CEO and Managing Director, ASK Property Fund:

“Residential real estate sales are likely to witness a strong growth momentum despite a status quo on the repo rates on the back of robust consumer confidence as also evident in strong presales growth recorded by most listed players across top cities. Ongoing and upcoming infrastructure and creation of new job corridors have led large well-established regional and national players to launch projects across micro markets of cities and cater to different income segments of the prospective home buyers. Factors like resilient domestic economic growth and strong launch pipeline for most players are likely to drive demand for new homes in the coming quarters as well.”

Dharmakirti Joshi, Chief Economist CRISIL, on today’s monetary policy: 

Monetary policy expectations from the most influential central bank in the world, the US Federal Reserve, are becoming less restrictive for the emerging markets. European Central Bank (ECB) and Bank of England (BOE) have already initiated rate cuts.

The Fed is now expected to begin cutting rates next month due to cooling labour markets.

On the domestic front, with a lower fiscal impulse and investment focused spending, the budget was clearly non-inflationary. But that is not enough for the Reserve Bank of India (RBI) to initiate rate cuts yet. Other domestic factors, particularly inflation, still dictate a cautious wait and watch approach.

Food inflation is a hurdle and without a durable decline in it, headline inflation cannot be tamed to 4% on a sustained basis. A pick-up in food inflation in June dragged consumer inflation to 5.1%. To boot, the growth momentum remains strong. Inflation should decline in July, but the RBI will overlook it because that will be purely high-base effect.

We expect RBI to begin cutting rates in October at the earliest and have penciled in two rate cuts this fiscal. By then, there will be clarity on food inflation as the monsoon would have played out. Good progress on rains and sowing so far offers hope.

Views on RBI Monetary Policy from Dr. Samantak Das, Chief Economist and Head – Research and REIS, India, JLL:

The Monetary Policy Committee’s decision to maintain the repo rates at 6.5% for the ninth consecutive time demonstrates a careful balance between a robust domestic economy and global uncertainties. The projected GDP growth for FY 2024-25 at 7.2%, along with controlled retail inflation, indicates positive signs for the Indian economy. The RBI’s intention in keeping rates unchanged is to ensure a stable interest rate environment and price stability in order to achieve sustained growth. While central banks in countries like Canada, Europe, and England have opted for rate cuts, the US Federal Reserve has chosen to keep its policy rate unchanged in its latest meeting. Heightened concerns about a possible recession in the US, triggered by a significant increase in the unemployment rate in July, have led to speculations regarding the implementation of emergency rate cuts by the US Central Bank. Nevertheless, future rate cuts in India will primarily be influenced by domestic factors. With food inflation still exhibiting sporadic behaviour, the RBI remains committed to sustaining inflation alignment with their targets on a durable basis. This commitment sets the stage for potential rate cuts in the final quarter of 2024 or early 2025, as the last phase of disinflation unfolds. India’s residential market continues to show robust performance, seen in the Q2 2024 numbers which were the highest ever in terms of quarterly sales, underpinning the strongest H1 performance for the sector. With the sentiment likely to sustain and further strengthen over the upcoming festive season, the current status quo on the repo rate would further support this momentum in 2025.

Manju Yagnik, Vice Chairperson of Nahar Group and Senior VP, NAREDCO, Maharashtra, said, “The RBI’s decision to maintain a status quo on the repo rate for the ninth consecutive policy review is a testament to the stability and caution in India’s economic environment. This consistent approach is beneficial for homebuyers and house loan borrowers, as it keeps EMIs modest and borrowing costs predictable. The real estate sector will benefit from this stability, leading to increased sales and investments, and ultimately promoting economic growth.”

Madhavi Arora, Lead Economist, Emkay Global:

RBI MPC: Focus on the still-elusive 4% inflation target*

✓ The fluidity of global Goldilocks narratives, financial markets turmoil and policy repricings found little space in the Governor’s speech, thanks to recent easing volatility in the financial markets. 

However, noisy food inflation back home, and a still-elusive 4% inflation target formed the base for the RBI decision making. Understandably, persistent food inflation (with sporadic volatility in vegetables and continued supply tightness in pulses), averaging at 8% in the past 12 months, has prevented durable disinflation. 

The Governor continued to stress on the spillover risks emanating from higher food prices to generalised inflation

While the MPC has been wary of spillover risks, we do not see core inflation moving above 4% till end-CY24 and averaging at sub-3.75% in FY25. We maintain that growth is sub-par in India and do not subscribe to the RBI’s estimate of FY25 growth at 7.2% (Emkay: 6.5%). Weaker demand dynamics will keep pressuring core inflation. Besides, lower input prices ahead may help ease some pressure on output prices as well.

But the RBI is likely to continue to stress being ‘actively disinflationary’, and be on wait-and-watch mode for assessing multiple macro forces - unless, of course, global winds force them to move focus to financial stability over the 4% inflation mandate. 

We understand that shifting debates on global narratives require the RBI to be flexible. However, the volatility in India FX and rates has been manageable amid the recent global market turmoils, giving flexibility to the RBI to stay focussed on domestic inflation and financial sector risk management.

We maintain Fed’s pivot will precede and impact RBI’s change in stance and rate action. Besides, staying relatively hawkish and highlighting the still-elusive durable 4% inflation target will only create unwanted INR carry, at a time when the RBI is still saddled with managing the problem of plenty, especially in H1FY25

We have built up substantial buffers which makes India more resilient than years ago, he said. 

Under the current monetary policy setting, inflation and growth are evolving in a balanced manner, he said. Inflation has been trending downward, but we have more distance to cover, he added. 

To reduce clearing cycle through continuous clearing - that is cheques will be cleared within a few hours of presentation, says RBI Guv. 

It is proposed to introduce a facility of delegated payments in the UPI. This would enable an individual who is a primary user to allow another individual, namely a secondary user, to make UPI transactions up to a limit, from the primary user’s bank account, without the need for the secondary user to have a separate bank account linked to UPI, said the Reserve Bank of India Governor Shaktikanta Das. 

Delegated payments to be allowed through UPI, he said. 

This measure will help consumers to identify unauthorized lending apps, said RBI Governor Shaktikanta Das. 

RBI-regulated entities to report about their apps, he said. 

To increase the frequency reporting of digital lending to fortnightly basis than monthly, RBI Governor said. 

ECB (external commercial borrowing) moderated during April-June quarter, he said. 

Forex reserves hit a historic high of $675 bn, he said. Confident of meeting external requirements, he said. 

We expect current account deficit to remain to eminently manageable, said the RBI Governor. CAD to be manageable in FY25, he added. 

Anuj Puri, Chairman - ANAROCK Group:

Double Boost for Housing Sector - Steady Repo Rate and Indexation Benefits Drive Market Optimism 

The RBI’s decision to keep repo rates unchanged at 6.5% for ninth consecutive time aligns well with yesterday’s announcement on indexation benefits. It sets a positive tone for the housing industry. Maintaining interest rates offers consistency in borrowing costs, which will prompt more aspiring homebuyers to consider taking the plunge - and thus drive demand in the housing market. With interest rates staying steady, EMIs will remain manageable for current and potential homeowners, potentially leading to increased home sales - particularly in the price-sensitive affordable segment. 

Yesterday’s announcement regarding indexation brings tax advantages for property investors, as it permits adjustments to the purchase price keeping inflation in mind, reducing capital gains tax burdens upon property sale. This provision increases the appeal of real estate investments, which will spur demand and capital flow into the housing sector. These combined actions bolster investor trust and position real estate as an avenue for long-term wealth growth. 

As housing demand rises due to favourable interest rates and taxation, we can expect overall boosted growth. This will encourage more project construction, job opportunities and broader economic gains. The collective impact of these measures improves affordability levels and boosts demand dynamics in India’s housing segment. 

Housing sales across the top 7 cities have been phenomenal in the last few quarters, even though prices are rising steadily. As per ANAROCK Research, we saw total housing sales of nearly 2.51 lakh units across the top 7 cities in H1 2024 - the highest half-yearly sales in the last decade. Meanwhile, average residential prices across the top 7 cities have seen a significant jump in the last one year – ranging between 13-39% in Q2 2024 when compared to Q2 2023. Thus, the breather which RBI’s unchanged repo rate will provide to home loan borrowers is apt and welcome.

It is necessary that that banks and financial institutions, build appropriate risk management frameworks in their IT cyber security, and third-party outsourcing arrangements to maintain operational resilience, he said. 

The sectors in which pre-emptive regulatory measures were announced by the Reserve Bank in November last year, have shown, moderation in credit growth, he said. 

Certain segments of personal loans continue to see high growth, he said. Home equity loans have been growing at a risk pace, he said. Top-up loans linked to housing attracting attention, he added. 

It is noticed that the regulatory prescriptions relating to loan to value that is LTV ratio, risk weights and monitoring of end use of funds have not been strictly adhered to by certain entities, he said. 

Banks and NBFCs would therefore be well advised to review such practices, he said. 

It is observed that alternative investment avenues are becoming more attractive to retail customers, he said. Banks are facing challenges on the funding front with bank deposits trailing loan growth, he added. Banks are taking greater recourse to short-term non-retail deposits, he added. This may potentially expose the banking system, structural, liquidity, he said. 

Banks are taking recourse to short-term funds, he said. Banks may focus more on household financial sales, he said. Banks may therefore focus more on mobilization of household financial savings through innovative products, he added. 

It is our responsibility point out areas where risks may come up in the banking system, he said. 

The global financial markets have seen turmoil on concerns of growth slow down in a major economy flare-up in geopolitical tensions in the Middle East, and the unwinding of carry trade, he said. It would be important for market participants to keep in mind the strength of India’s macroeconomic fundamentals which remain robust, he added. India has built strong buffers that impact resilient, he said. 

The Reserve Bank will continue to be nimble and flexible in its liquidity management, operation, he said. 

10-yr g-sec yield softened in June, July and Aug so far, he added. 

In FY25 so far rupee has been range-bound, he said. 

Yields on Cds and 3-month bills eased, says the governor. Term premium remain steady, he added. 

Pace of inflation moderation is uneven and needs to be watched, he said. We need to watchful to ensure CPI inflation is aligned to 4% target, he added. 

Our target is the headline inflation, where food inflation has a weight of about 46%, he said. Food inflation cannot be ignored, he added.

The public at large understands inflation more in terms of food inflation than the other components of inflation, he said. 

We cannot and should not become complacent because core inflation has fallen, he said. High food inflation adversely affects household inflation expectation which has an impact on future inflation trajectory, he added. 

MPC has to be vigilant of high food inflation, he said. MPC may look through food inflation if it is transient, he added. 

CPI inflation for the current financial year is projected at 4.5% with q2 at 4.4% q3 at 4.7% and q4 at 4.3%. CPI for Q1 of FY26 seen at 4.4%.

Core inflation touched a new low, he said. High inflation continued in July, he said. Softening in core inflation continues to be broad-based, he added. 

Global food prices easing in July, he said. 

There is considerable divergence between headline and core inflation, he said. 

Food inflation contributed to more than 75 per cent of headline inflation in May, June, he said. Vegetable processing increased sharply and contributed to 35% in June, he added. High food price momentum is likey to have continued in July, he added.

The impact of the revision in milk prices and mobile tariffs also needs to be carefully monitored, said the governor. 

A degree of relief in food inflation is expected due to progress in monsoon and kharif sowing, he said. 

We have slightly moderated the growth projection for the first quarter of the current financial year in relation to the projection. This is primarily due to updated information on certain high-frequency indicators which show lower than anticipated corporate profitability, government expenditure and core industries output

Lower corporate profitability in Q1, says RBI Governor Shaktikanta Das. 

Q1 GDP - 7.1%; Q2 GDP- 7.2%; Q3 GDP 7.3%; Q4 GDP 7.2%

Real GDP growth for q1 of next financial year (FY26) is projected at 7.2%.

The spillovers from protracted geopolitical tensions, volatility in international financial markets and geo-economic fragmentation pose risks on the downside, he said. 

Capex by the government and visible signs of pickup in private investment would drive investment activity in the current year, he added. 

Sustained buoyancy in services activity is expected to support urban consumption, he said

Services exports recorded double-digit growth in May and moderated in June, he said. 

Amid the government’s continued thrust on capex and other policy support from the government, private corporate investment is gaining steam on the back, said the RBI Governor. 

Household consumption is supporting turnaround in rural demand and steady discretionary spending in urban areas, he said.

PMI services stood strong at 60.3 in July, and is above 60 for seven consecutive months, indicating robust expansion of services. 

PMI for manufacturing at 58.1 in July remained elevated, says RBI Guv.

Manufacturing to gain ground on improving demand, he said. 

Likelihood of La Nino condition will have a bearing on agriculture, he added. Good monsoon to help agriculture sector, he said. 

Domestic economic activity continues resiliency, he added.

Demographic shifts, climate change, geopolitical tensions and fragmentations, rising public debt and new technologies such as artificial intelligence pose a new set of challenges, said the Reserve Bank of India Governor Shaktikanta Das. 

Inflation is receding gradually across major economies, he said. Several central banks are cautiously moving towards policy pivots, he added.

There have been tightening by a few central banks, and a few economies are on rate hike mode, RBI Guv added. 

Without price stability high growth cannot be sustained, he said. We have decided to focus on price stability mainly to support growth, he added. 

In a situation where the GDP is holding up, we have decided to focus on inflation and ensure price stability, mainly to support growth, said RBI Governor. 

It is important for monetary policy to stay the course while remaining vigilant, RBI Governor said. 

Resilient and steady growth in GDP enables monetary policy to focus unambiguously on inflation, he added. 

Domestic growth holding up well on steady urban consumption and growing rural consumption, said Guv Shaktikanta Das. 

MPC took the decision on a 4:2 voting basis. RBI Guv said to remain focused on “withdrawal of accommodation.”

There’s good amount of convergence between market expectations and RBI policy.

Focus remains on keeping inflation under target while focusing on growth, said RBI Governor.

The Indian rupee rose marginally in early trading on Thursday, aided by gains in most Asian currencies, with dollar-rupee forward premiums also ticking up ahead of the Reserve Bank of India’s (RBI) monetary policy decision. 

Bank of Japan (BOJ) Deputy Governor Shinichi Uchida said on Wednesday the central bank won’t raise interest rates when financial markets are unstable.

The recent strengthening of the yen would affect the BOJ’s policy decision because it reduces upward pressure on import prices, and therefore overall inflation, Uchida said.

BSE Sensex opened lower by 221.80 pts or 0.28% at 79,246.21, and Nifty 50 was down by 65.40 pts or 0.27% at 24,232.10 as at 9.15 am.

The Reserve Bank is expected to hold its key rates at the forthcoming policy review, but may sound more confident about reaching its 4 per cent inflation objective, a foreign brokerage said on Wednesday.

The rate-setting panel may prefer to stick to the ‘withdrawal of accommodation’ stance of the monetary policy, HSBC said in the report on the eve of the RBI MPC’s decision.

The Indian benchmark indices, Sensex and Nifty, are expected to open flat on Thursday. Gift Nifty at 24,175 indicates a marginal rise at open, as Nifty futures on the NSE on Wednesday closed at 24,366.45. According to analysts, the focus has now shifted to the RBI monetary policy outcome. The central bank has kept rates unchanged at 6.5 per cent for the last 18 months, and analysts expect yet another status quo stance.

India must take a relook at its current inflation targeting framework and explore one that would target an inflation rate excluding the volatile food component, Economic Survey for 2023-24 suggested on Monday.

The Survey’s suggestion comes at a time when India’s retail inflation, as measured by consumer price index (CPI), rose to four-month high of 5.08 per cent in June compared with 4.75 per cent in the previous month. This spike was largely fuelled by surge in food inflation at 9.4 per cent on the back of sharp rise in prices of vegetables.

The Reserve Bank of India’s Monetary Policy Committee’s June 2024 highlights can be read here.

The Reserve Bank of India’s Monetary Policy Committee’s April 2024 highlights can be read here.

The Reserve Bank of India’s Monetary Policy Committee’s February 2024 highlights can be read here.

The Reserve Bank of India’s Monetary Policy Committee’s December 2023 highlights can be read here.

Retail inflation, measured by the Consumer Price Index (CPI), accelerated to a four-month high of 5.08 per cent in June 2024, driven by a spike in food inflation to 9.36 per cent due to rising prices of vegetables and pulses. This June 2024 reading is also higher than the 4.87 per cent recorded in the same month last year, official data released on Friday showed.

The latest CPI inflation figures have reinforced the Reserve Bank of India’s decision to avoid cutting repo rates, despite two MPC members recently suggesting that maintaining high interest rates may be hindering economic growth.

With the economy showing strong growth momentum and retail inflation staying above the RBI’s comfort zone, majority of the rate-setting monetary policy committee (MPC) members are likely to vote for a status quo in the policy repo rate and continuation of the “withdrawal of accommodation” stance at their upcoming meeting.

With the upcoming monetary policy on August 8, expectations are rife that the repo rate will remain unchanged at 6.5 per cent as CPI inflation is still away from the 4 per cent mark.

Foreign banks and brokerages expect a status quo on policy rate at 6.5 per cent at the upcoming RBI’s Monetary Policy Committee (MPC) meeting on August 6-8. They further expect the RBI to retain its monetary policy stance as “withdrawal of accommodation”.