RBI May Hold Interest Rate at 6.5% as Inflation Remains High

Experts believe the Reserve Bank of India (RBI) may hold the repo rate at 6.5% for the fourth time in a row at its bi-monthly monetary policy review meeting in early October, as retail inflation remains high. The RBI”s last interest rate hike was on February 8, 2023, to 6.5%. Since then, it has maintained the status quo due to high inflation caused by both macroeconomic and domestic factors, such as oil price hikes and low monsoon rains.

Madan Sabnavis, Chief Economist at Bank of Baroda, stated, “We anticipate the Reserve Bank of India (RBI) to maintain a status quo position this time due to persistently high inflation and tight liquidity. In fact, according to the RBI”s inflation forecast, it is expected to remain above 5% in Q3, ensuring that the status quo prevails throughout the calendar year and possibly into Q4.”

Sabnavis further highlighted uncertainties surrounding the Kharif crop, particularly pulses, which could lead to price hikes. However, he added, “The positive aspect is that there are fewer concerns regarding growth, which remains on target.”

Consumer Price Index (CPI)-based retail inflation was dragged down slightly to 6.83% in August from 7.44% in July by a fall in vegetable and food prices. However, the CPI inflation is still above the RBI”s tolerance level of 6%. The RBI aims to restrict retail inflation between 2-4% as instructed by the central government.

Aditi Nayar, Chief Economist, ICRA Limited, believes retail inflation may reach 5.3-5.5% in September 2023 due to a further fall in vegetable prices as well as a favorable base. However, she believes the RBI may not consider this scenario and would decide to hold the interest rate at 6.5% in October. The RBI has a view that rising crude oil prices will affect staples and may soon rise accordingly.