RBI likely to keep rates unchanged at upcoming policy meeting
What's the story
The Reserve Bank of India (RBI) is likely to maintain its interest rates at the upcoming policy meeting, bucking the trend of several global central banks. This comes as inflation remains moderate despite rising global oil prices and measures to support the rupee are attracting strong capital inflows. A Reuters poll shows that 68 out of 72 economists expect RBI's Monetary Policy Committee (MPC) to keep rates unchanged on Wednesday.
International response
Global central banks' rate hikes since US-Iran war began
Central banks in Europe, Australia, Indonesia, the Philippines, Singapore, South Korea, and South Africa have raised their benchmark borrowing costs since the US-Israel war on Iran started five months ago.
However, the Federal Reserve and Bank of Japan have kept their rates unchanged.
This global trend highlights how geopolitical tensions are influencing monetary policy decisions across different countries.
Inflation dynamics
RBI's retail inflation and core inflation
The RBI's retail inflation rate rose to 4.38% in June, crossing the bank's 4% target for the first time in 17 months.
However, it still remained within the central bank's tolerance band of 2%-6%.
Core inflation, which excludes volatile food and fuel prices, has also remained stable at around 4%.
This stability gives RBI room to maneuver against short-term supply shocks without having to raise rates immediately.
Market outlook
Wholesale inflation rose to 9.87% in June
RBI Governor Sanjay Malhotra recently told The Hindu BusinessLine that there are limited signs of higher fuel prices spilling over into broader-based inflation.
However, a central bank survey in May showed that inflation expectations have risen, indicating building pressures.
Wholesale inflation also rose to 9.87% in June, further complicating the monetary policy landscape for the RBI as it tries to balance growth and price stability.
Policy actions
Capital inflows surge after RBI's policy tweaks
Ahead of its June policy meeting, the RBI had scrapped capital gains tax for foreign investors in Indian government bonds and improved dollar deposit schemes for NRIs.
These measures have drawn nearly $40 billion in capital inflows.
However, despite a temporary rally in the rupee, the currency has come under pressure as fresh Gulf tensions pushed oil prices higher.