RBI likely to keep policy interest rates unchanged for 8th time in a row

New Delhi: The Reserve Bank of India (RBI) is widely expected to keep key policy interest rates unchanged for the eighth time in a row on Friday as food prices remain volatile despite easing in inflation and a coalition government at the Centre raises concern over fiscal populism, economists and experts said.

The monetary policy committee (MPC) of the RBI started its three-day meeting on June 5, a day after Lok Sabha election results showed diminished mandate for Prime Minister Narendra Modi-led coalition National Democratic Alliance (NDA). Though Modi is set to become prime minister for the third time in a row, analysts say he would find it challenging to push forward economic reforms due to coalition compulsions.

“We expect RBI will continue to pursue withdrawal of accommodation and no change in policy repo rate or CRR in the upcoming monetary policy tomorrow,” Economic Research Department of SBI said in a note.

“The RBI is expected to maintain its current stance,” said Vinod Nair, head of research at Geojit Financial Services, adding the central bank is likely to maintain the status quo until inflation is brought within the target range of 4%.

Although the Consumer Price Index (CPI) based retail inflation declined to 4.83% in April from the previous month’s 4.85%, food inflation remained stubbornly high at 8.7%.

Nair said the other challenges in front of the central bank include “extreme weather conditions, stock market volatility, and geopolitical tensions.”

The RBI has kept its policy repo rate unchanged for the past 15 months. Repo rate, the interest rate at which the RBI lends short-term funds to banks, remains unchanged at 6.5% since February 2023.

The standing deposit facility (SDF) rate has remained unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75% for the past 15 months. These are the key policy rates that determine the lending and borrowing rates by the commercial banks and other financial institutions.

The central bank has maintained its hawkish stance of “withdrawal of accommodation” since June 2022. Most economists expect that the RBI will continue with this stance till inflation is brought down to its medium-term target of 4% on a sustainable basis.

On the possible impact of the RBI monetary policy committee decision on the stock markets, Nair said, “It is likely to be a non-event for the markets. The market will focus on the inflation and GDP forecast of FY25, a reduction in inflation and increase in GDP trajectory will be taken as positive.”

According to SBI research, CPI inflation is expected to approach the RBI tolerance band (mid-point of 4%) in the first half of the current financial year.

CPI inflation is expected to remain close to 5% till May and declining thereafter to 3% in July. Inflation is expected to stay below 5% beginning October till the end of FY25. For the whole FY25, CPI inflation is likely to average to 4.5%, SBI Research said. The headline retail inflation averaged 5.4% in the financial year 2023-24.