RBI to Hold Rates Steady at 6.50%

'The RBI's MPC will maintain the current policy rates (6.50%) at the policy meeting, given ongoing inflationary pressures.'

With inflationary pressures continuing, the Reserve Bank of India's Monetary Policy Committee is expected to retain the repo rate (the rate at which RBI lends to the banks) at 6.50% while the focus would also be on the liquidity management, top economists said.

The six member MPC is scheduled to have its three day meeting from December 4 to 6, 2024.

"The RBI's MPC will maintain the current policy rates (6.50%) and stance in the upcoming meeting, given the ongoing inflationary pressures, particularly within the food basket," says Rajani Sinha, Chief Economist, CARE Ratings.

"The Consumer Price Index (CPI) inflation reached a 14-month high of 6.2% in October, exceeding the RBI's upper tolerance threshold. Persistent price increases in vegetables, pulses, and edible oils have kept food inflation elevated," Sinha added.

There are early indications of a slowdown in economic activity, Sinha said, although overall growth is still projected to remain healthy, with a potential pickup in the second half of the fiscal year.

As a result, the MPC is likely to prioritise price stability and keep the policy rates unchanged during the December meeting.

At the same time, it will closely monitor the evolving growth trajectory, Sinha remarked.

Expecting the RBI to revise up its inflation projections closer to CARE Ratings estimate of 4.8% for FY25 Sinha added that the central bank would also likely reduce growth projections to 7%, in line with the projections.

On his part Madan Sabnavis, Chief Economist, Bank of Baroda said, "There will be no change in the repo rate as the last two inflation numbers are above 5% with October being 6.2%."

"We need to see if there are any revisions in the growth and inflation forecasts -- especially inflation where Q3 will definitely be higher than what was projected by the RBI last time," Sabnavis added.

In its latest report Economic Outlook Asia-Pacific Q1 2025: US Trade Shift Blurs The Horizon published on Monday S&P Global Ratings said: 'The impending change in the US administration will be challenging for China and the rest of Asia-Pacific.'

'US tariff increases have become more likely, especially on China, and possible changes in the US macro picture are leading to different interest rate expectations,' S&P Global Ratings added.

'While much of the region should be able to continue to grow solidly, central banks will probably remain cautious by not reducing their policy rates too fast. And risks have gone up,' the S&P Global Ratings report noted.

With regard to India, S&P Global Ratings see GDP growth easing to 6.8% this fiscal year as high interest rates and a lower fiscal impulse temper urban demand.

According to S&P Global Ratings, the RBI is expected to cut its interest rate only once in the current fiscal.

"We anticipate that there are chances of a shallow rate cut of 25 bps in the February policy, provided food inflation moderates," CARE Ratings' Sinha said.

"The RBI should consider reducing rates in the upcoming monetary policy as it will further boost investment in the real estate sector," said Ramani Sastri, Chairman & MD, Sterling Developers.

"We definitely hope to see lower interest rates which will provide further impetus to not just real estate and housing demand but across industries and economic growth," Sastri added.

The repo rate plays a crucial role in determining home loan interest rates and hence, in this context, it is an extremely sensitive factor in the housing market, pointed out Sastri.

Queried about the other issues that the MPC would focus at its meeting Sinha replied that it will be liquidity management.

"The weighted average call money rate has risen sharply, nearing the MSF (marginal standing facility) rate, averaging 6.7%. Increased forex interventions, as reflected in the decline in foreign exchange reserves, along with seasonal fluctuations in currency circulation, have led to a reduction in systemic liquidity," Sinha said.

While the RBI has conducted Variable Rate Reverse Repo (VRR) auctions to support money market rates, it will be crucial to observe how the RBI plans to manage liquidity moving forward, Sinha added.

As regards the unanimity amongst the MPC member at next week's meeting Sinha said: "The 5:6 majority in the policy repo rate decision is expected to persist unless Q2 GDP growth significantly underperforms market expectations."

At its October 2024 meeting, the MPC in a 5:1 vote, decided to hold on to the repo rate.

The sole contra vote was by one of the three new MPC members, Dr Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi.

Dr Kumar wanted the MPC to reduce the repo rate by 25 basis points (bps) to 6.25%.

However the MPC was unanimous in its decision for a change in stance from 'withdrawal of accommodation' to 'neutral' and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

On the aspect of unanimity in the MPC at next week's meeting Sabnavis said: "I would tend to believe there will be unanimity given that there is uncertainty on the possible course of policy action in the USA post January.

"Therefore, a pause (in the repo rate) would be prudent."

Venkatachari Jagannathan can be reached at
venkatacharijagannathan@gmail.com