RBI May Not Tinker with the Rate in the Upcoming MPC, Wait for Global Cues

Risks to inflation are likely to stem from food price-related volatility driven by weather-related shocks and volatility in global commodity prices. Experts expect the Reserve Bank of India to highlight these risk factors and sound slightly cautious on the inflation front.

Kolkata (West Bengal):Even though the macro-stability of India is far on a strong footing and India's growth momentum continues to remain strong but the Reserve Bank of India is unlikely to cut rates at its upcoming Monetary Policy Committee (MPC) meeting to be held between June 5- June 7.

RBI might look for cues from global Central Banks for a rate cut action and is not likely to make a move ahead of the Federal Reserve as a cautionary measure.

While there has been a broad-based moderation in inflation over the last few months, volatility in food inflation has kept the headline number slightly elevated. The headline CPI inflation remained steady at 4.83 per cent. At the same time, the CPI ex-vegetable which captures around 94 per cent of the total CPI basket, fell to 3.22 per cent (vs 3.77 per cent in February 2024) and the core CPI (ex-Food and Fuel) also corrected slightly to 3.2 per cent (vs 3.34 per cent in Feb 2024).

Based on the current trend, the core-CPI is expected to slide down further to around 3.4 per cent by first half of FY25. "Although the RBI's target is based on headline CPI, we believe, the RBI would draw comfort from falling core inflation which tends to be stickier," said Pankaj Pathak, senior fund manager at Quantum AMC.

However, risks to inflation are likely to stem from food price-related volatility driven by weather-related shocks and volatility in global commodity prices. Experts expect the RBI to highlight these risk factors and sound slightly cautious on the inflation front.

"Much in line with the street consensus, we believe the RBI is likely to continue to maintain its pause on policy rates, leaving the repo rate unchanged at 6.5 per cent. We also expect the policy stance to stay put at 'withdrawal of accommodation,' added Pathak.

Macro-stability of India is thus far on a strong footing. India’s growth momentum continues to remain strong. Domestic high-frequency data support also positive outlook.

The domestic factors alone shall not be the sole drivers to warrant a rate cut action by the RBI. "We believe the RBI might look for cues from global Central Banks for a rate cut action and is not likely to make a move ahead of the FED as a cautionary measure," said Nilanjan Dey, director of Wishlist Capital.

In fact, the 'State of the Economy' article published in the RBI's May 2024 Bulletin maintained "it is only in the second half of the year that a durable alignment with the target may re-commence and sustain till numbers closer to the target are sighted during the course of 2025-26".

Thus, going into this policy, the RBI shall deliver another 'do nothing' policy while sounding cautious on the inflation outlook and the global economic environment.

"We continue to hold our positive outlook on Indian bonds supported by a structural shift in demand supply balance, and a cyclical turn in inflation and monetary policy,” Pathak said.

To recap, the RBI announced a dividend of Rs 2.1 trillion (0.6 per cent of GDP), significantly higher than the market estimates and government's dividend estimate in the interim budget for FY25 as well. Such high dividend works in favour of the government's fiscal consolidation plan.

Such large dividend is on the back of higher interest income on foreign securities. RBI’s foreign currency assets (FCA) rose by 13.8 per cent y-o-y in FY24 (period up to 29th of March 2024), largely led by FX reserve accumulations.