The Monetary Policy Committee (MPC), which will be meeting from August 6-8, would likely keep policy rates unchanged on account of elevated food inflation, economists at Barclays India & Goldman Sachs Economics Research said in separate notes.
“Enduring upward food price pressure on headline inflation would likely keep the MPC cautious in August,” Shreya Sodhani and Amruta Ghare of Barclays India wrote in a note. “We expect the MPC to keep policy settings unchanged in a 4-2 vote. With no urgency to cut rates given steady growth, we see a risk of rate cuts being delayed beyond December,” they added.
“The MPC has lots to digest since the last meeting in June: food price pressures halted the disinflationary trend in the headline rate in June, the Union Budget maintained its commitment to fiscal consolidation, and the U.S. Fed is now hinting at a September cut. Domestic growth indicators remain broadly steady, which should be taken as a source of comfort by the MPC,” the Barclays economists wrote.
Stating that they continue to expect the window for a rate cut to open only in December, they flagged the risk that the first cut could be delayed into 2025.
“Recent communication by the RBI has turned increasingly cautious over elevated food inflation, which continues to prevent durable disinflation in the headline rate,” Ms. Sodhani and Ms. Ghare observed.
“We expect the RBI MPC to keep the policy repo rate unchanged at the August 8 meeting at 6.5%, with a 4:2 vote in favour, retain the monetary policy stance of ‘withdrawal of accommodation’, sound relatively optimistic on growth, and continue to reiterate the commitment to the 4% headline inflation target,” they added.
Goldman Sachs economists stated that elevated and broad-based food inflation had kept H1 calendar year 2024 headline inflation near 5% YoY, even as core inflation continued to decline.
“Going forward, even though a high base last year is going to pull headline inflation down towards 4% in Q3, there are upside risks to food inflation due to an uneven monsoon,” they said.
“On core inflation, we expect core services inflation to bottom out in Q3 and increase towards 4% by end-2024 driven by an up-turn in housing (rental) inflation, and higher core goods inflation,” they added.
