While the overall growth rate is expected to remain healthy, the MPC is likely to remain cautious and monitor any emerging risks to inflation.

Mumbai : In a significant development in the inflationary trend in the country, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is expected to maintain the status quo on the repo rate and hence no change in the repo rate in the near future. The October Monetary Policy Committee will meet on Friday.

The rate at which RBI lends to banks is the repo rate. However, they differ in their views on the role of the RBI. Credit rating agency CARE Ratings said the MPC is expected to keep the policy repo rate unchanged on Thursday. “

With the policy repo rate at 6.5 per cent, it is expected to remain in a 'dwelling withdrawal' position,” CARE Ratings said in a report. This decision is primarily based on the risks to the inflation outlook.

Overall growth is expected to stay healthy

While the overall growth rate is expected to remain healthy, the MPC is likely to remain cautious and monitor any emerging risks to inflation. Despite an above-average monsoon so far (6.4 percent above the long-term average as of August 4), the overall risk of food inflation remains high due to highly uneven rainfall in the first half of the monsoon, according to CARE Ratings. Although southern states have received good rainfall, major agricultural regions, particularly in north and east India, such as Punjab, Haryana and the eastern Gangetic plains continue to experience double-digit rainfall deficits, CARE Ratings said.

Although kharif sowing of foodgrains is 5.7 per cent higher than last year (till 2 August), it is marginally lower than the comparable period in 2022. Area sown under all major food categories – cereals (4.5 per cent), pulses (10.9 per cent), and oilseeds (3 per cent) – is higher than last year, CARE Rating said. Apart from food inflation risks, the recent hike in telecom tariffs by major mobile service providers by 10-25 per cent will put upward pressure on core inflation. Telecom services accounted for around 2.1 percent of the overall Consumer Price Index (CPI) basket and 4.4 percent of core inflation.

A result of the recent sales tax increase

The recent sales tax hike on fuel prices in some states will have a marginal impact on the inflationary stance. Moreover, incremental price revisions of aviation turbine fuel (ATF) and commercial cooking gas by major state-owned retailers could have a second-order impact on CPI. The credit rating agency also expects the RBI to maintain its growth forecast of 7.2 percent for FY25. However, Parijat Aggarwal, head of fixed income at Union Mutual Fund, has a different take on the RBI's stance.

“Inflationary pressures have eased and monsoon concerns have eased. Fiscal consolidation seems to have provided the needed relief as it follows a glide path. We expect policy to be dovish given the recent weakness in the global economy and volatility in financial markets. We expect policy rates to remain unchanged; The Monetary Policy Committee may change its neutral stance,” Agarwal said. According to Bank of Baroda economist Aditi Gupta, the MPC will keep the repo rate steady as well as maintain its 'accommodation withdrawal' role.

Incidentally, the monetary policy stance was last changed in June 2022. This is because the RBI is unlikely to find relief with the elevated level of food inflation in recent months, Gupta said. On the other hand, domestic growth momentum remains strong, giving the RBI room to keep rates at current levels until there is sufficient confidence that inflationary pressures have eased on a sustainable basis. According to experts, the Reserve Bank may cut rates marginally by the end of the year depending on inflation and geo-political conditions. The decision of the MPC will be announced on Thursday.

(with input from agencies)