Reserve Bank to retain benchmark rate at 6.5% at ensuing monetary policy review meeting: Experts

Mumbai: Interest rates for retail, as well as corporate borrowers, may remain stable as experts expect the Reserve Bank to retain the benchmark rate at 6.5 per cent at its forthcoming bi-monthly monetary policy review, scheduled later this week, in view of elevated inflation and global factors, say experts.

The Reserve Bank started increasing the policy rate in May 2022 in tranches, in the wake of the Russia-Ukraine war and took it to 6.5 per cent in February this year. Since then, it has kept the rate unchanged in the last three successive bi-monthly monetary policy reviews.

The RBI Governor-headed six-member Monetary Policy Committee (MPC) is scheduled to meet for three days beginning October 4. Governor Skhatikanta Das will announce the decision on Friday (October 6).

"The credit policy this time will most likely continue with the existing rate structure as well as policy stance. Hence, the repo rate will be retained at 6.5 per cent with the stance of withdrawal of accommodation," opined Madan Sabnavis, Chief Economist, Bank of Baroda.

He further said retail inflation is still high at 6.8 per cent and expected to come down sharply in September and October, but there is still some pessimism on Kharif output especially relating to pulses which has the potential to push up prices further.

"But as the inflation trajectory is downwards a rate hike can be ruled out. However, we may have to wait for a longer time for the MPC to cut the repo rate," he said.

Karthik Srinivasan, Senior Vice President & Group Head - Financial Sector Ratings, ICRA Limited also expects the MPC to maintain status quo on the policy rate as well as the stance.

"The significant tightening in liquidity that was seen in the second half of September is unlikely to sustain, particularly with the release of liquidity from incremental CRR imposed in previous policy," he said.

He further said, the RBI is likely to remain cautious on sharp rise in interest rates in developing economies since the last policy review and the impact it may have on the capital flows, forex reserves and the exchange rate as well.

The Reserve Bank has been mandated by the government to ensure the Consumer Price Index (CPI) based retail inflation remains at 4 per cent, with a margin of 2 per cent on either side.

President of realtors' body association NAREDCO Rajan Bandelkar said the RBI's accommodative stance is expected to persist during the October MPC meeting.

"While there has been a lengthy pause (on repo rate), there is a pressing need to shift our attention towards the real estate sector, especially during the ongoing festive season. Positive actions by the RBI at this juncture could play a pivotal role in achieving our housing targets," he said.

The borrowing cost which started rising in May last year has stabilised with RBI keeping the repo rate unchanged at 6.5 per cent since February, when it was raised from 6.25 per cent. Later in the next three bi-monthly policy reviews in April, June and August the benchmark rate was retained.

On expectations from the next monetary policy, Aman Sarin, Managing Director, Anant Raj Limited said that in the recent past, the central bank has taken many effective steps to ensure that liquidity is available, inflation is under control and business is growing.

"We are very hopeful that RBI will maintain its current policies, focusing on bolstering economic growth particularly in light of the approaching festive season while keeping a watchful eye on inflation and liquidity in the system," he said.

Parijat Agrawal, head-fixed income, Union Asset Management Company, said the headline inflation is expected to cool down in September as compared to August, but it still remains above the RBI's comfort zone.

"The recent spike in crude oil prices and global bond yields shall keep MPC vigilant on inflation-growth dynamics. The MPC is expected to maintain the status quo on rates and stance at the upcoming October meeting," Agrawal said.

Mandar Pitale, Head- Treasury, SBM Bank India, said overnight rates are ruling about an average of 15 bps above repo rate for a reasonable time owing to tight liquidity conditions.

"This can be construed as having a similar impact to a 25 bps hike in repo rate. Further, RBI will retain the stance of withdrawal of accommodation as CPI is unlikely to come below 5 per cent during the rest of FY24," Pitale said.

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.

In an off-cycle meeting in May 2022, the MPC raised the policy rate by 40 basis points and it was followed by rate hikes of varying sizes, in each of the five subsequent meetings till February 2023. The repo rate was raised by 250 basis points cumulatively between May 2022 and February 2023.

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).