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Published: June 5, 2023
Updated: June 5, 2023

RBI Expected to Maintain Interest Rate Pause as Inflation Declines, Experts Say

As inflation continues to decline, experts anticipate that the Reserve Bank of India (RBI) will maintain its policy repo rate at 6.5% during its upcoming June 8 announcement. The easing of retail inflation in April and the potential for further decline indicate the effectiveness of previous policy rate actions. With the meeting of the Monetary Policy Committee (MPC) scheduled for June 6-8, the decision will be announced on Thursday, June 8.

Inflation Decline and Previous Rate Actions:

After the last MPC meeting in April, the RBI opted to pause its rate hike cycle and maintain the repo rate at 6.5%. The central bank had previously increased the repo rate by 250 basis points since May 2022 in an effort to curb inflation. The backdrop for the current MPC meeting is the consumer price-based (CPI) inflation, which reached an 18-month low of 4.7% in April. Governor Shaktikanta Das recently indicated that the May CPI would be even lower. The CPI for May is set to be announced on June 12.

Expectations of Continued Rate Pause:

Experts, including Madan Sabnavis, Chief Economist of Bank of Baroda, believe that the RBI is likely to continue pausing on interest rates and maintain the repo rate at 6.5%. The lower- than-expected inflation figures for April and anticipated further decline support this view. Sabnavis suggests that the past repo rate actions have had an effect on inflation, reinforcing the need for another pause. While the policy stance will continue with the withdrawal of accommodation, liquidity has increased due to the announcement of the exchange of the Rs 2,000 notes. The RBI will also closely monitor the progress of the monsoon and the potential impact of El Nino on the kharif harvest and prices.

Bankers' and Industry Expectations:

Bankers expect the RBI to continue its pause in the forthcoming policy, considering the already increased repo rate and moderate inflation. Rajneesh Karnatak, Managing Director of Bank of India, states that wholesale and retail inflation data currently indicate a moderate level. Echoing these sentiments, Asheesh Pandey, Executive Director of Bank of Maharashtra, suggests that the RBI will maintain a wait-and-watch approach before considering any rate adjustments. Considering inflation, liquidity, and recent GDP figures, Pandey concludes that the RBI is likely to maintain the interest rate pause.

With inflation declining and the effectiveness of previous policy rate actions, the RBI is expected to maintain the interest rate pause. The actual decision will depend on various economic factors, including inflation trends, global economic conditions, and prevailing challenges. The market eagerly awaits cues on liquidity management and the impact of the Rs 2,000 notes re-entering the banking system. Overall, maintaining the interest rate pause is seen as a support for the demand trajectory in the country and to sustain GDP growth.