The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) began its three-day meeting today, with the policy decision due on August 5. Economists widely expect the central bank to keep the benchmark repo rate unchanged at 5.25 per cent for a fourth straight meeting as it balances easing inflation with rising global risks.
A Reuters poll conducted between July 21 and July 27 showed that 68 of 72 economists expect the MPC to leave the repo rate unchanged. Four economists expect a 25-basis-point hike. The broad consensus is also for the RBI to retain its neutral policy stance.
While the policy rate is expected to remain unchanged, markets will closely watch the RBI’s commentary on inflation, growth, liquidity and external risks. Investors will also look for any changes to the central bank’s economic projections and guidance on the future policy path.
Why economists expect a pause
The RBI comes to the meeting with a mixed economic picture. Consumer price inflation increased to 4.38 percent in June, surpassing the 4 percent target of the central bank for the first time in 17 months. Food inflation was 5.32 percent, adding to the upward pressure on overall inflation. On the other hand, the economy has remained robust; however, there is a constant vigilance for any sign of economic moderation.
There will also be the issue of global factors that will dominate the discussion of the MPC members. The increase in the price of crude oil, geopolitical issues, uncertainties about global trade, and US Federal Reserve policy will constitute some risks to inflation and the economy. Uneven monsoons and disruption of food supplies due to the weather also constitute major concerns.
Economists believe these factors strengthen the case for the RBI to wait for more clarity before making any policy changes. Citi expects the central bank to lower its inflation forecast, reducing the need for an immediate policy move. Nomura has said stronger-than-expected growth gives the RBI room to remain patient, although higher oil prices and weather-related risks warrant caution. JPMorgan has also advised that policymakers should remain prepared for multiple global risks rather than respond to a single trigger.
Markets to track policy guidance
Beyond the repo rate, markets will closely track the RBI’s assessment of liquidity conditions. Investors will also watch for any indication of changes to liquidity management tools or open market operations, although no major measures are widely expected. The base case remains that the RBI will leave the Standing Deposit Facility, Marginal Standing Facility and other key policy rates unchanged.
Current economic figures will also shed some light on the policy move. The July flash composite PMI fell to 54.3, the lowest rate of growth for more than four years, implying that economic activity has slowed down. Nevertheless, the PMI was still higher than 50, meaning that private-sector economic activity kept growing.
Focus on RBI’s outlook
In the case of financial markets, however, the policy announcement may carry more weight than the interest rate decision. Even if there is no change in interest rates, any shift in the RBI’s position regarding inflation, growth, and liquidity can affect yields on government securities and the exchange rate.
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Prabhat Gupta is Senior Copy Editor of Business Segment. He has worked across broadcast and digital newsrooms, editing and producing stories on politics, business, regulation and current affairs. His work has included writing on global markets and regulatory developments, along with long-form editorial content on business and governance.
He holds a master’s degree in Political Science from the University of Delhi and qualified UGC-NET in the subject, bringing an academic grounding to public affairs and policy coverage.
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