The Reserve Bank of India (RBI) is expected to hold the policy repo rate constant on Thursday with retail inflation easing to an 18-month low amid prospects for a further moderation in inflation.
Economists feel the six-member monetary policy committee (MPC) will leave the policy repo rate untouched at 6.50 per cent for the second time running as they would draw comfort from the fall in inflation in April. The monetary policy committee (MPC) will begin its three-day deliberations on Tuesday.
Headline CPI inflation in April dropped to an 18-month low of 4.7 per cent from 5.66 per cent in March. It was for the second consecutive month that inflation remained within the tolerance band of 2-6 per cent of the RBI.
The fall in core inflation to 5.1 per cent is another encouraging factor favouring a status quo in rates.
Core inflation — which is inflation minus the food and fuel components — has remained sticky at around 6 per cent in the preceding months.
RBI governor Shaktikanta Das had said the dip in inflation was a reflection of the fact that its monetary policy was on the right track.
Given the good news on inflation, economists feel the central bank will go on an extended pause in rates at least till December.
However, few do not rule out the possibility of a cut in rates either in October or December.
“In June, the MPC is likely to maintain a status quo on rates and in the absence of a major global risk event, we may be in for a prolonged policy pause,’’ Churchill Bhatt, executive vice-president & debt fund manager, Kotak Mahindra Life Insurance, said.
With the inflation print coming lower in April, some experts feel MPC could lower its projection for the year to 5.1 per cent from 5.2 per cent. MPC had projected inflation for the first quarter at 5.1 per cent, 5.4 per cent both for the second and third quarters and 5.2 per cent for Q4.
Others feel the RBI will be mindful of the El Nino factor, and this could prevent it from revising the forecast.
The focus is also on whether MPC will make any changes to its stance, and experts said it will continue with the withdrawal of accommodation amid comfortable liquidity. The withdrawal of the Rs 2,000 banknotes will also add more liquidity.
