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Published: October 6, 2023
Updated: October 6, 2023

RBI Likely to Maintain 6.5% Benchmark Rate Amidst Inflation Concerns

In the latest bi-monthly monetary policy review, experts anticipate that the Reserve Bank of India (RBI) will opt to retain the benchmark rate at 6.5%. This decision comes in light of growing concerns over inflation and various global factors that have influenced the economic landscape.

Inflation Concerns:

Between the last MPC meeting in August and the present, inflation has surged. Despite robust economic growth, global factors have taken a somewhat adverse turn, particularly with the aggressive stance of the US Federal Reserve, leading to higher yields. Given this scenario, experts suggest that the central bank is likely to maintain the status quo on policy rates in the upcoming policy review.

Emphasis on Inflation:

The RBI's primary focus is expected to be on inflation, given the current strength of economic growth. Additionally, close attention will be paid to the movements in oil prices, which remain a crucial determinant in shaping monetary policy decisions. The anticipation is that interest rates will remain on the higher side, hinting at the unlikelihood of any rate cuts in the fiscal year.

Inflation Mandate:

The central government has tasked the Reserve Bank with the responsibility of ensuring that Consumer Price Index (CPI)-based inflation remains at 4%, with a permissible margin of 2% on either side. Recent data shows retail inflation surging to a 15-month high of 7.44% in July, primarily due to significant price spikes in vegetables and other food items.

Global Macroeconomic Landscape:

Siddhartha Sanyal, Chief Economist of Bandhan Bank, acknowledges the complexity of the global macroeconomic backdrop, marked by uncertainties surrounding growth. In such circumstances, the Monetary Policy Committee (MPC) is expected to remain vigilant, possibly hinting at the likelihood of higher interest rates persisting over an extended period.

Breathing Space from Softening Agro Commodity Prices:

On a positive note, a softening trend in the prices of agricultural commodities since August has provided some respite to the MPC. This breathing space may enable the committee to refrain from taking any immediate rate actions.

Consensus on No Policy Rate Change:

Aalesh Avlani, Founder and Director of CreditWise Capital, echoes the sentiment, asserting that there is unlikely to be any change in policy rates during the upcoming announcement.

Previous Rate Actions:

The RBI had initiated a series of policy rate hikes in May 2022, prompted by the Russia- Ukraine conflict. This series ultimately led to the benchmark rate reaching 6.5% in February of the current year. Subsequently, the rate has remained unchanged in the past three bi- monthly monetary policy reviews.

The Role of Interest Rates:

Umesh Chowdhury, Vice-Chairman and MD of Titagarh Rail Systems, underscores the significance of government policies and capital expenditure in stimulating infrastructure growth. He emphasises that the interest rate regime will continue to play a pivotal role in shaping the landscape for the manufacturing sector, with a lot of opportunities emerging, which necessitates private sector capital expenditure.

All signs point towards the RBI maintaining the benchmark rate at 6.5% in the upcoming monetary policy review. This decision stems from concerns over inflation, an intricate global economic environment, and the RBI's focus on preserving economic stability. The interest rate regime remains a crucial factor, especially in the context of infrastructure and manufacturing sector growth.