RBI MPC Preview: Status Quo To Continue

India's Monetary Policy Committee will meet from Aug. 6 to 8, its first meeting after the final Union Budget and the Fed signalling chances of a rate cut in September. In India, inflation has seen a modest uptick since the last policy meeting in June, while economic growth remains robust. 

All economists polled by Bloomberg expect the MPC to maintain status quo for the ninth straight meeting. The benchmark lending rate, or the repo rate, will remain unchanged at 6.5%.

Enduring upward food price pressure on headline inflation will likely keep the MPC cautious in August, stated a research note by Shreya Sodhani, regional economist at Barclays. "We expect the MPC to keep policy settings unchanged in a 4-2 vote," she said, noting that the steady growth and lack of urgency to cut rates could potentially delay the first rate cut beyond December.

Its also the current MPC's last meet before its term ends and new members are appointed. During the tenure of the current MPC, the 4% target has eluded the committee, but for justifiable reasons such as the ongoing volatility caused by vegetable prices currently. 

CPI Inflation

India's retail inflation surged to a four-month high in June, driven by rise in prices of vegetables. The Consumer Price Index-based inflation rose to 5.08% in June, compared to 4.75% in May, led by vegetables prices.

CPI inflation is expected to remain below or close to 5.0% in the remaining months, except for September and October, the State Bank of India said in a note. The MPC stated in its June resolution that there is a need to closely monitor the arrivals of key rabi crops, particularly pulses and vegetables, given the recent sharp upturn in prices. Normal monsoons, however, could lead to a softening of food inflation pressures over the course of the year, it said.

The cumulative kharif sowing stood at 905 lakh hectares as of Aug. 2, 2024, 82% of the full-season normal acreage and 3% higher than the corresponding date of the previous year, according to data from the Ministry of Agriculture. Going forward, the Indian Metrology Department, or IMD, forecasts above-normal rainfall, which augurs well for replenishment of reservoir levels and further progress of kharif sowing.

Bond Market

Government bond yields have softened significantly since the last policy due to both global and domestic factors. Expectations of monetary policy easing by the Fed and other major global central banks have led to softening of bond yields across the globe, including India, according to Bank of Baroda in a research note. On the domestic side, lower borrowings by the government, buying by FPIs and soft global oil prices have led to a downward bias for India's benchmark 10-year yield.

Since June this year, the yield on 10-year G-sec has fallen to sub-7%, currently.

Rupee

The Indian rupee recently touched record lows against the US dollar, despite continuing intervention by the central bank. In recent months, the demand for the merchant dollar has surpassed the supply in both the spot and forward markets, leading to a surge in long dollar positions, according to a note from SBI. Thus, the rupee might remain under pressure, it said.

However, inclusion in the JPMorgan Bond Index will provide the necessary support for the dollar-rupee exchange rate. Though the recent move by the RBI to exclude new issuances of 14-year and 30-year G-secs from the Fully Accessible Route, or FAR, could create uncertainty among the FPIs, the large domestic investors can absorb the fresh supply of these tenures easily, said Soumya Kanti Ghosh, chief economist at SBI.

Overall, the rupee is likely to trade between Rs 82.5 and Rs 83.5 per dollar, he said.