By Swati Bhat
MUMBAI (Reuters) – India’s central bank is widely expected to keep interest rates steady and retain its tighter monetary stance at its policy review on Friday amid robust economic growth and an uncertain inflation outlook.
However, a weakened mandate for the ruling Bharatiya Janata Party-led National Democratic Alliance has raised concerns about a potentially slower pace of fiscal consolidation alongside increased welfare spending.
Such a scenario could pose a risk to India’s inflation and monetary policy outlooks over the medium to longer-term.
Though fiscal consolidation prospects remain intact, the pace of debt reduction could slow in the wake of the election results, Moody’s ratings told Reuters.
All but one of 72 economists in a May 17-30 Reuters poll expected India’s Monetary Policy Committee (MPC) to hold the repo rate steady at 6.50% at the conclusion of its June 5-7 meeting. Most economists believe the 6.50% rate is the peak of the current monetary cycle.
“RBI view is based on macro fundamentals. Given that inflation remains above target levels, RBI is expected to remain on pause. Strong growth conditions provide policy space to remain focused on inflation,” said Gaura Sen Gupta, chief economist at IDFC First Bank.
The MPC last changed rates in February 2023, when the policy rate was hiked to 6.5%. Annual retail inflation rose at a slower rate of 4.83% in April, from a gain of 4.85% in March but was still well above the MPC’s 4% medium-term target.
“We expect the MPC to extend the pause of rates in June, with an unchanged policy stance,” said Radhika Rao, an economist with DBS Bank in Singapore.
“An 8% GDP growth print, above-target inflation and uncertainty over the U.S. Fed’s direction is expected to keep the RBI MPC comfortable in its stance at this juncture,” she added.
GDP data last week showed the economy expanded at a faster-than-expected pace of 7.8% in the March quarter, taking the South Asian nation’s full year growth to 8.2%.
Though markets have largely factored in a ‘no surprise’ policy on Friday, there is an outside chance of a change in policy stance to neutral, a handful of analysts believe.
If the MPC does change its stance to ‘neutral’ from ‘withdrawal of accommodation’, bond yields are expected to fall, in hopes of an earlier rate cut than anticipated.
“We think that the committee will lay the foundation for policy easing by officially changing its policy stance,” Capital Economics said.
“We think the easing cycle will begin in August and we expect slightly more rate cuts by the end of the year than the consensus is forecasting.”
(Reporting by Swati Bhat; Editing by Shri Navaratnam)
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