The rate setting panel may also leave the monetary policy stance unchanged at ‘withdrawal of accommodation’.
The repo rate — the rate at which the RBI lends money to banks to meet their short-term funding needs — is expected to remain unchanged at 6.5 per cent.
Daily retail food prices indicate rise in food inflation pressures in the month of May 2024, she said.
Analysts said the monetary policy stance of ‘withdrawal of accommodation’ is also likely to remain unchanged in the June policy.
When is RBI expected to cut repo rate?
The Reserve Bank of India’s Monetary Policy Committee (MPC), which is scheduled to meet from June 5 to 7, is expected to keep the repo rate steady at 6.5 per cent as sticky food inflation continues to remain a threat to the inflation.
The rate setting panel may also leave the monetary policy stance unchanged at ‘withdrawal of accommodation’. Some market experts are of the opinion that the RBI may change the FY25 gross domestic product (GDP) growth projection but will leave inflation forecast unchanged.
So, what is expected from the RBI’s upcoming monetary policy?
In the policy scheduled to be announced on June 7, the six-member rate-setting panel of the RBI is likely to maintain status-quo for the eighth time in a row, market experts said. The repo rate — the rate at which the RBI lends money to banks to meet their short-term funding needs — is expected to remain unchanged at 6.5 per cent.
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“RBI is expected to remain on pause in the June meeting, as inflation remains above the 4 per cent target. The policy space to remain on pause is provided by strong growth conditions,” said Gaura Sen Gupta, Chief Economist, IDFC FIRST Bank.
The overall tone of the policy will remain cautious with upside risk to food inflation from current heat wave conditions. Daily retail food prices indicate rise in food inflation pressures in the month of May 2024, she said.
Under the flexible inflation targeting regime, the RBI has to maintain consumer price-based inflation (CPI) in the 2-6 per cent range. The RBI has been targeting to bring inflation down to 4 per cent on a durable basis. In April, headline inflation moderated to 4.8 per cent from 4.9 per cent.
In 2023-24, food inflation surged to 7 per cent from 6.7 per cent a year ago, impacted by sustained pressures from prices of cereals, pulses, spices and vegetables due to overlapping supply shocks.
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“The MPC members from the RBI have sounded cautious on sticky food inflation owing to supply side disruptions due to the ongoing hot weather conditions in many parts of India. In our view, they may want to see progress of the monsoons and sowing of the summer (Kharif) crop to assess the food inflation trajectory in the second half of calendar year 2024, before pivoting towards monetary policy easing,” Goldman Sachs said in its research report.
Will there be any change in monetary policy stance?
Analysts said the monetary policy stance of ‘withdrawal of accommodation’ is also likely to remain unchanged in the June policy.
On an average, liquidity remained in deficit in May 2024 (till May 30) at Rs 1.42 lakh crore, compared with a surplus of Rs 20,240 crore in April. A part of the reason for pressure on liquidity is limited government spending during the general elections, said Sonal Badhan, Economist Bank of Baroda.
“We expect RBI to maintain tight liquidity in the coming months as well, to maintain pressure on short-term yields, which may in turn support the rupee. Thus, we expect RBI to keep its stance—“withdrawal of accommodation”—unchanged in the June policy,” she said.
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IDFC FIRST Bank’s Sen Gupta said the status quo on stance will signal that RBI is not in a hurry to cut interest rates anytime soon given the uncertainty on food inflation and Fed policy outlook.
Will RBI revise GDP and inflation projections?
While most economists expect RBI to keep real GDP forecast unchanged at 7 per cent, a few see a possibility of an upward revision.
“As economic activity remains broadly resilient, RBI will remain in wait and watch mode. We believe that RBI may revise its FY25 GDP projections upward in the upcoming policy meet,” said Bank of Baroda’s Badhan.
The RBI will keep the FY25 CPI inflation forecast unchanged at 4.5 per cent, analysts said.
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So, what happens to lending rates if repo rate is left steady?
With the RBI expected to leave the repo rate steady at 6.5 per cent, all external benchmark lending rates (EBLR) that are linked to the repo rate will not rise, providing a relief to borrowers as their equated monthly instalments (EMIs) will not increase.
However, lenders may raise interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of a 250 bps hike in the repo rate between May 2022 and February 2023 has not happened.
When is RBI expected to cut repo rate?
“We push our RBI rate cut call back by one quarter to Q4 (October-December) of calendar year 2024 (CY24) vs Q3 (July-September), with the first cut most likely in the December 2024 meeting,” Goldman Sachs report said.
It expects a shallow easing cycle of total 50 basis points (bps) rate cuts from the RBI, with 25 bps rate cuts each in Q4 CY24 and Q1 CY25. One basis point is one-hundredth of a percentage point.
