StanChart Bank expects food prices to push up overall inflation to 8.3 per cent in December, which will prompt the Central Bank to raise policy rates by 50 basis points in the current fiscal.
With retail inflation surprising on the upside, the six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) is expected to increase the repo rate by 35-50 basis points (bps) in the review scheduled for September 28-30. According to economists, the central bank will continue to focus on bringing inflation down even though economic growth has remained sluggish. Data released by the government on Monday showed that the consumer price index (CPI)-based inflation increased by 7 per cent year-on-year (YoY) in August, thus, staying above the upper tolerance limit of the central bank for all the eight months of 2022.
The central bank had revised its inflation forecast significantly downward in the last policy
According to the global investment banking major, the RBI will continue to gradually shift its focus to reviving growth from exclusively fighting inflation since 2010 and is likely to cut rates in June by 25bp, and by 50bp in March 2014 quarter.
Domestic fund houses are of the view that the US Fed's status quo stance on rates is a positive indication for RBI to lower its lending rates.
All six members of the Reserve Bank of India's (RBI's) monetary policy committee (MPC) expressed caution over food inflation during the December review, while two external members warned about high real interest rates as headline inflation approaches its target of 4 per cent. The central bank continued to maintain the status quo on both the repo rate and the stance in the December monetary policy. India's retail inflation in November rose to 5.5 per cent - its fastest pace in three months - due to higher food prices.
The Reserve Bank has told the International Monetary Fund (IMF) that the objective of frequent interventions in the forex market is to curb excessive volatility, dismissing the Fund's rationale for reclassifying India's exchange rate regime. The IMF, following the Article IV consultation with the Indian authorities, reclassified the status of the exchange rate regime to "stabilised arrangement" from "floating" for period between December 2022 to October 2023. India's Executive Director at IMF K V Subramanian and Senior Advisors Sanjay Kumar Hansda and Anand Singh questioned the selection period adopted by the Fund for analysis and also reclassification of the country's exchange rate regime.
A Kotak research report expects RBI to cuts rates by 50 basis points in the first half of 2019. RBI will announce its sixth bi-monthly monetary policy on February 7.
Inflation breached the upper end of the RBI's comfort level of 4 per cent plus-minus two percentage points.
The rupee has depreciated 10.5 per cent against the dollar this year, making it Asia's worst-performing currency.
In the 30-share Sensex constituents, 16 ended lower and 14 gained, helping the benchmark indices trim losses.
With the RBI infusing Rs 7.5 lakh crore in liquidity -- and possibly more in the future -- the short- to medium-term corporate bond market is expected to benefit.
"We want a drop in interest rate. This (interest rate) is a huge problem now for us. Real interest rate in India today is touching six percent," Ficci chief Pankaj Patel said, arguing that there should be balance between growth, inflation, and interest rates.
The RBI's mistake may have been in interpreting its mandate to maintain retail inflation at 4%, with 2% leeway in either direction, as being a mandate that permitted it to do nothing even when inflation was at or near the upper bound of 6%, observes T N Ninan.
The Reserve Bank on Friday retained inflation projection at 4.5 per cent for the current financial year, lower than 5.4 per cent in the last fiscal. Assuming a normal monsoon this year, CPI (consumer price index-based) inflation for the current year is projected at 4.5 per cent, with Q1 at 4.9 per cent, Q2 at 3.8 per cent, Q3 at 4.6 per cent, and Q4 at 4.5 per cent.
Foreign lender Royal Bank of Scotland on Thursday said RBI is likely to hike its policy rates by up to one percentage point this year even as the headline inflation is likely to fall to 6-7 per cent on the back of a good monsoon.
RBI likely to cut rate early next year.
The Reserve Bank of India's (RBI's) state of the economy report observed that any durable alignment of headline retail inflation with the target of 4 per cent could recommence in the second half of FY25 and sustain until numbers closer to the target are seen during the course of FY26, dashing hopes of any reduction in the policy repo rate in the current financial year. The report, authored by RBI staffers, including Deputy Governor in charge of monetary policy Michael Patra, said though headline numbers may fall in July and August due to base effect, it is likely to reverse in September.
Auto sector cheers RBI rate cut as 'festival gift'
Reversal in the declining economic growth trajectory is clearly the need of the hour and all steps should be taken to bring about this change.
The RBI wants CPI inflation to ease further to 6 per cent by January 2016.
Equities went into a tailspin on Wednesday after the Reserve Bank surprised the market with a mid-cycle rate hike in a bid to tame soaring inflation.
If net forex outflows turn out to be relatively high in the next few years, the rupee could depreciate beyond Rs 80 to a dollar by 2022. The causal reasons could, for example, include unmet expectations of FPI and FDI investors about the performance of the Indian economy, sharp rise in prices of imported oil and decrease in FX remittances. The RBI has to ask itself whether guaranteeing future rupee-dollar exchange rates on FX forward contracts is a reasonable way to use its risk-bearing capacity, says Jaimini Bhagwati.
'One way of doing this could be offering credit guarantee to the banks, say 10 per cent, for fresh loans given to micro, small and medium enterprises,' observes Tamal Bandyopadhyay.
According to the financial services major, the recent decline in inflation, driven largely by food prices, gives the RBI room to pause monetary tightening.
The RBI's Monetary Policy Committee brainstormed the impact of any future shocks on the inflation trajectory and stressed monitoring the cumulative effect of monetary policy actions over the past one year, which is still unfolding, revealed minutes of the rate-setting panel released on Thursday. The minutes of the meeting of the Monetary Policy Committee (MPC), headed by Reserve Bank Governor Shaktikanta Das, also indicated it would be premature to declare an end to the monetary tightening cycle, which started in May 2022 to check high inflation following the outbreak of the Russia-Ukraine war. The central bank, which effected six back-to-back hikes in the key short-term lending rate (repo) since May 2022 to check high inflation, decided to take a pause early this month.
The top 20 fund houses held 6.8 per cent of their portfolios in cash as of May 31, down from a record high of 7.2 per cent in April 2025.
This call comes even as both RBI as well as the government are fighting high inflation, driven by a massive jump in vegetable prices since mid-December with unseasonal rain affecting crops.
'A possible post-election growth momentum may be lost.'
The policy statement by the RBI governor is also expected to be upbeat.
RBI Governor Raghuram Rajan is expected to express that cautiousness as he looks to manage expectations.
The challenge for the RBI in 2024 is likely to be less about containing elevated inflation and more about curbing excessive financial market exuberance and a 'problem of plenty', notes Sajjid Chinoy, Chief India Economist JP Morgan.
The central bank and Indian government has reached a "broad consensus" on the composition of a rate-setting panel.
'Once bitten, twice shy, I didn't take up the challenge this time...' 'I realised I had failed to follow my karma because I feared failure.'
In an eventful week ahead, stock markets may face volatile trends before the RBI's interest rate decision and the US inflation data announcements, as investors continue to assess the broader implications of US tariffs on global economy and inflation, analysts said. Investors fear that a full-blown trade war will impact global trade and economic growth, according to market experts.
Policymakers have been grappling with high prices for food staples such as onions and potatoes even after the central bank raised interest rates by a quarter percentage point in each of its previous two reviews.
The Reserve Bank of India on Friday raised the benchmark lending rate by 50 basis points to 5.40 per cent to tame inflation.
A combination of factors, including heavy investments in US Treasury bonds and dollar sales at a healthy profit, facilitated the Indian central bank in transferring a record surplus of Rs 2.11 trillion to the government for 2023-24 (FY24). The RBI's dollar purchases increased in FY24, supported by robust capital inflows endorsing the economy's health.
As inflation rate is near the upper limit of the comfort zone, experts rule out rate cuts anytime soon
The fourth consecutive rate cut is expected to lower equated monthly instalments (EMIs) for home and auto buyers, and borrowing cost for corporate.
