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Updated December 3rd, 2023 at 16:40 IST

Experts predict RBI to retain 6.5% interest rate amid comfortable economic growth and inflation rate

India’ central bank is likely maintain a short term interest rate in its monetary policy review later this week

Business Desk
RBI to retain 6.5% interest rate
RBI to retain 6.5% interest rate | Image:RBI Governor Shaktikanta Das
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The Reserve Bank of India (RBI) is likely to maintain their status quo on short-term interest rates in the monetary policy review to be done later this week, on the back of inflation staying in comfort zone and the economic growth moving at an accelerated pace, experts suggest.

RBI has left the benchmark policy rate (repo) unchanged in its past four bi-monthly monetary policies, having last increased the repo rate in February to 6.5 per cent, and ending the interest rate hiking spree which began in May 2022 following the Russia-Ukraine war. Of late, the world has been marred by subsequent disruptions in the global supply chain, which has had a ripple effect on India with higher inflation rates.

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The 6-member Monetary Policy Committee (MPC) is headed by RBI Governor Shaktikanta Das and is set to begin its three-day deliberations on December 6, with the governor unveiling the decision of the committee on the morning of December 8.

India retained the tag of the world's fastest-growing major economy, with our Gross Domestic Product (GDP) expanding at a faster-than-expected rate of 7.6 per cent in the July-September quarter, on the back of robust manufacturing sector.

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Chief economist of Bank of Baroda Madan Sabnavis said the central bank will most likely maintain the status quo on rates as well as stance this time around. "The high growth witnessed in Q2 in GDP will provide assurance that the economy is on track. The low core inflation numbers in the last few months will provide comfort that there is no need to increase rates even while headline inflation is likely to be volatile in the upward direction," he added.

Some direction on liquidity will be useful to the market as the system is in deficit for quite some time, Sabnavis highlighted.

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Nomura’s India economist Aurodeep Nandi also expects the MPC to unanimously vote to pause at its December policy meeting.

"Of particular interest will be RBI's commentary around OMO sales, which were announced in the previous policy meeting, but tight liquidity conditions have so far made the implementation difficult. Our baseline view is that the RBI will continue with the policy and stance pause for now," Nandi said.

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Chairman of Dhanuka Group RG Agarwal said Indian agriculture must embrace technological advancements and implement farm mechanisation to boost crop yields and improve farmers' livelihoods.

"This necessitates both public and private sector investments, which hinge on access to affordable financing. While both the Reserve Bank of India and the government have taken prior measures to address this issue, additional incentives, such as monetary and fiscal benefits, are required to promote farm mechanisation," he added.

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The retail inflation (CPI) eased to a four-month low of 4.87 per cent in October, mainly due to cooling prices of food items. The Reserve Bank's Monetary Policy Committee (MPC), in its October meeting, projected CPI inflation at 5.4 per cent for 2023-24, a moderation from 6.7 per cent in 2022-23.

Mohit Jain, Managing Director, Krisumi Corporation, opined that this successive pause in interest rate hikes reiterates RBI's commitment to provide broad-based growth in the economy with financial stability.

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"The policy decision will facilitate a stable ecosystem for economic activity. This will bring a sigh of relief for homeowners since they have been feeling the strain of increased interest rates on long-term loans. In the housing sector, a stable interest rate environment will not only foster confidence among potential buyers but also make housing loans more accessible and affordable," he added.

The MPC is entrusted with the responsibility of deciding the policy repo rate with the objective of achieving the inflation target, keeping in mind the objective of growth.

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On his expectations from the MPC, Prasenjit Basu, chief economist, ICICI Securities, said with CPI inflation moderating to 4.87 per cent year-on-year in October 2023 "we expect the RBI to keep the policy repo rate unchanged at its next MPC meeting. The prospect of further easing in inflationary pressure is likely to result in the MPC moving to a neutral policy stance (from the previous stance of 'withdrawal of accommodation')."

The MPC consists of three external members and three officials of the RBI. The external members on the panel are Shashanka Bhide, Ashima Goyal, and Jayanth R Varma. Besides Governor Das, the other RBI officials in MPC are Rajiv Ranjan (Executive Director) and Michael Debabrata Patra (Deputy Governor).

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(With PTI inputs.)

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Published December 3rd, 2023 at 16:38 IST

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