RBI Policy: Six factors that the monetary policy committee will consider while making a decision
4 min read 09 Aug 2023, 01:07 PM ISTRBI may maintain the status quo on rates and monetary stance despite a rise in food prices and the July US Fed rate hike.
PremiumThe monetary policy committee (MPC) of the Reserve Bank of India (RBI) may maintain a status quo on policy rates and monetary stance on Thursday but the six-member committee has at least six major factors to consider before they reveal the country's short-term monetary policy.
Experts believe the RBI will maintain a status quo on rates and stance on August 10. And this pause could be prolonged because the chances of rate cuts this year look feeble due to the recent sharp rise in vegetable prices and the US Fed rate hikes.
A rate hike in the near term also is not on the cards as the central bank may want to wait for the next few months to observe the evolving trend of inflation before going for rate hikes.
Let's take a look at the six crucial factors that the monetary policy committee may consider while making a decision on policy rates and stance:
1. Recent uptick in food inflation
There has been a sharp uptick in the prices of vegetables and pulses in the last few weeks which has raised the risk of food inflation.
Morgan Stanley expects India's retail inflation to leap to 6.2 per cent at the end of the quarter ended September, against its previous forecast of 5.5 per cent, due to higher food inflation. The Consumer Price Index (CPI) based inflation is, however, expected to moderate to a 5-6 per cent range during the second half of FY24.
Shreyansh Shah, a research analyst at StoxBox believes that the recent surge in vegetable prices is transient and would be interesting to see whether the central bank resorts to any upward revision to its consumer price inflation forecast.
Read more: RBI Policy: How the Indian stock market is expected to react tomorrow
2. US Fed resumes rate hikes
After a pause in June, the US Federal Reserve hiked the benchmark rates to a 22-year-high in the range of 5.25 per cent to 5.50 per cent in July. Moreover, it signalled more hikes were possible if inflation does not come down to its target level of 2 per cent.
Usually, the Reserve Bank of India (RBI) raises rates in India to mitigate the impact of Fed hikes on foreign capital inflow and the rupee's health. Investors will focus on what RBI thinks about the resumption of rate hikes in the US.
"It would be interesting to see the tone of policymakers following the recent decision of the US Federal Reserve to resume interest rate hike which has narrowed the US-India interest rate gap," said Shah.
Read more: Can RBI go the Fed-way? A guide on investing in a high-interest rate regime
3. Domestic growth scenario
The RBI will take into account India's macroeconomic outlook. Recently Morgan Stanley upgraded India to 'overweight' while downgrading China to 'equal-weight', citing that situation in India is in "stark contrast to that in China."
On the other hand, S&P Global believes the Indian economy may grow at an average rate of 6.7 per cent between fiscal 2023-24 (FY24) to fiscal 2030-2031 (FY31).
The RBI does not have scope for a rate cut at this time but it may also not go for a rate hike in the near future despite a rise in inflation, for it would not want to jeopardize the country's economic growth.
"While a rate cut still looks far away, probably into the next fiscal year, the RBI has a task at hand to manage inflation without jeopardizing economic growth which has been the fastest amongst major economies around the globe," Shah said.
4. Progress of monsoon
Monsoon is a critical factor for the Indian economy. As the risk of El Nino persists, the RBI will closely observe the trend of the monsoon before finalising its monetary policy.
After 28 per cent plus excess rainfall last month, August is expected to be dry, as precipitation will likely be below normal at around 90 per cent of the long period average (LPA), said Jatin Singh, managing director of private weather forecaster Skymet in an interview.
Read more: ‘August rainfall could be below normal’
"Though the RBI may take some comfort from the declining core inflation, we expect it to continue with its hawkish stance, especially amid the prevailing global uncertainties and the likely occurrence of El Nino," said Shah.
5. The condition of Indian banks
The RBI is also expected to take stock of the condition of Indian banks amid the recent credit downgrades in the US.
Rating agency Moody's cut credit ratings of 10 small and midsize US banks on Monday and said it may downgrade some of the nation's biggest lenders also.
The rating agency also adopted a “negative" outlook for 11 lenders, including PNC Financial Services Group, Capital One Financial Corp., Citizens Financial Group Inc., Fifth Third Bancorp, Regions Financial Corp., Ally Financial Inc., Bank OZK and Huntington Bancshares Inc.
Read more: Moody's downgrades credit ratings for 10 US banks, more cuts likely; stocks fall 1-3%
6. Global economic environment
India remains one of the brightest economies in the world but the country will not remain immune to global economic slowdown.
Recently Fitch Ratings downgraded the US credit ratings to 'AA+' from 'AAA' with a 'stable' outlook while Morgan Stanley upgraded India to 'overweight'. RBI will also assess how global economic conditions will impact India.
There are several other factors such as crude oil price trajectory, India's current account deficit and trade balance data, that the central bank will surely take into account before deciding on the policy stance.
Read more: RBI policy meet: Why you should look beyond RBI and focus on stock market fundamentals
Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before taking any investment decisions.
