MPC to Hold Rates on Sticky Food Inflation

Mumbai: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to retain short term lending rates along with the withdrawal of accomodation stance as the headline CPI (Consumer price- based inflation) may remain sticky due to volatile food inflation. The six-member MPC headed by the RBI governor will start its three-day deliberations on June 5 and the decision on rates will be announced on Friday June 7.

Economists expect the MPC to cut rates in the October-December quarter of the calendar year 2024.

Parijat Agrawal, Head – Fixed Income at Union Mutual Fund said, “The Headline CPI may remain sticky due to volatile food inflation. Any rate cut depends upon CPI moving towards 4 per cent on a durable basis and is also contingent on the US FOMC decision.”

While economic growth conditions remain strong, inflation still remains above the central bank’s 4 per cent target. The Consumer Price Index (CPI) inflation eased marginally to 4.8 per cent in April from 4.9 per cent in March. Food inflation, however, edged up to 8.7 per cent from 8.5 per cent, driven by costlier cereals and meat; vegetables have been sticky at elevated levels, softened a touch.

Prices of edible oils fell at a softer pace on year. On the other hand, the Indian economy rose by 8.2 per cent in FY24 after expanding by 7.2 per cent FY23.

The repo rate, the rate at which the RBI lends money to banks to meet their short-term funding needs — is expected to remain unchanged at 6.5 per cent. A status quo in repo rate means that all external benchmark lending rates (EBLR) that are linked to the repo rate will remain unchanged providing relief to borrowers. However, lenders may raise interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR), where the entire transmission of the 250 bps hike in the repo rate has not happened.

The RBI has hiked policy rates by 250 basis points between May 2022 and February 2023, since then it has kept the repo rate unchanged at 6.5 per cent. This will be the eighth consecutive time that the repo rate will remain unchanged. On an average, liquidity remained in deficit in May 2024 at Rs 1.42 lakh crore, compared with a surplus of Rs 20,240 crore in April. A part of the reason for pressure on liquidity is limited government spending during the general elections.