India’s central bank is expected to hold interest rates and maintain its tighter monetary stance at its policy review on Friday, amid robust economic growth and an uncertain inflation outlook.
However, a weakened mandate for the National Democratic Alliance led by the ruling Bharatiya Janata Party has raised concerns about a potentially slower pace of fiscal consolidation alongside increased social spending.
Such a scenario could pose a risk to India’s inflation and monetary policy outlook in the medium to long term.
Although the outlook for fiscal consolidation remains intact, the pace of debt reduction may slow following the election results, ratings agency Moody’s told Reuters.
All but one of 72 economists polled by Reuters between May 17 and 30 expect India’s Monetary Policy Committee (MPC) to maintain the repo rate at 6.50% at the end of its meeting from June 5 to 7. Most economists believe the 6.50% rate is the high point of the current monetary cycle.
“The RBI’s view is based on macroeconomic fundamentals. As inflation remains above target levels, the RBI is expected to remain on pause. Strong growth conditions allow policy to remain focused on inflation ” said Gaura Sen Gupta, chief economist at IDFC First Bank.
The Monetary Policy Committee last changed rates in February 2023, when the policy rate was raised to 6.5%. Annual retail inflation rose at a slower pace of 4.83% in April, compared with a gain of 4.85% in March, but remained well above the medium-term target of 4% set by the Monetary Policy Committee.
“We expect the monetary policy committee to extend the rate pause in June, with an unchanged policy stance,” said Radhika Rao, an economist at DBS Bank in Singapore.
“GDP growth of 8%, above-target inflation and uncertainty over the direction of the US Fed should keep the RBI’s monetary policy committee in a comfortable position at this stage,” he said. she added.
GDP data last week showed the economy expanded at a faster-than-expected pace of 7.8% in the March quarter, taking the South Asian nation’s annual growth to 8.2%.
Although markets largely priced in a “no surprises” policy on Friday, some analysts believe there is a remote chance that the monetary policy stance becomes neutral.
If the Monetary Policy Committee changes its stance from “withdrawal from accommodation” to “neutral”, bond yields are expected to fall, on hopes of a faster-than-expected rate cut.
“We believe the committee will lay the groundwork for easing monetary policy by formally changing its position,” Capital Economics said.
“We think the easing cycle will begin in August and we expect slightly more rate cuts by the end of the year than the consensus forecast. (Reporting by Swati Bhat, Editing by Shri Navaratnam)
