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MPC likely to keep pause button pressed when it comes to RBI’s monetary policy


A number of eminent economists believe the Reserve Bank of India’s Monetary Policy Committee (MPC) will decide to pause interest rate hikes later this week. As a result of cooler inflation, the RBI Governor Shaktikanta Das-led panel is expected to maintain the repo rate at 6.5%.

According to the CPI, retail inflation in April was 4.7%, down from 5.66% in March. This is comfortably below the central bank’s upper tolerance limit of 6%.

Besides cooler inflation, uncertainty about global commodity prices and growth could lead the MPC to maintain its ‘wait and watch’ approach.

A potential El Nio and the start of the monsoon season will also factor into the MPC’s decision-making.

As the MPC prefers to stay on hold this month to gauge how weather conditions affect price trends, we expect the stance to remain unchanged. The support for the recovery also reduces the need for a quick turn in policy direction, according to Radhika Rao, DBS Group’s senior economist.

RBI governor Shaktikanta Das has been raising concerns about sticky core inflation for a long time, so this fall comes as a welcome relief.

Pause for a long time

According to economists, the MPC will maintain its rate pause for the second consecutive meeting, after breaking away from the FOMC and keeping rates unchanged in April.

As the Federal Reserve’s future rate path remains uncertain, Deepak Agrawal, Kotak Mahindra AMC’s chief investment officer for debt, anticipates a dovish message from the MPC.

The focus is now on whether the MPC will signal a pivot in its monetary policy or continue to withdraw accommodation.

A long pause

There is a consensus among economists that we could be in for a prolonged pause, likely lasting until 2023.

According to Goldman Sachs analysts, the RBI will likely keep the policy repo rate unchanged at 6.50% in the June 8 policy meeting.

Inflation cooler, growth stronger

In Q4, India’s GDP grew by 6.1% against forecasts of just 5%. In FY23, too, the GDP numbers were above even the government’s estimates of 7.2%.

With April’s inflation print coming in at 4.7%, there is further room for declines in May and June, according to Goldman Sachs analysts.

According to economists, most economic indicators across agriculture, manufacturing, and services are holding up.

A downgrade in inflation estimates is expected at the June MPC meeting, according to economists at SBI Research.

Inflation data for October will be decisively below 5% as a result of RBI’s frontloaded rate action.

While a rate pause is highly likely, any hint of a pivot in monetary policy will be closely monitored by economists.

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