RBI's MPC meeting begins today: What to expect
What's the story
The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) meeting starts today. RBI Governor Sanjay Malhotra will announce the policy decision on Friday, June 5. While borrowers and fixed deposit investors expect a status quo on interest rates, market's attention will be on RBI's inflation and GDP forecasts as well as its take on depreciating rupee amid global uncertainty.
Market conditions
RBI likely to keep rates unchanged
The June policy review comes amid prolonged West Asia tensions, rising crude oil and gas prices, supply-chain disruptions, and a sharp rupee depreciation. These factors have heightened inflation and growth concerns. A Moneycontrol poll of 16 economists, fixed-income heads and treasury chiefs found that despite inflationary risks, a weakening rupee, and high Brent crude prices, the RBI is likely to keep benchmark interest rates unchanged at this week's MPC meeting.
Policy expectations
More hawkish tone, neutral stance expected
While the consensus is for a status quo on rates, experts expect the MPC to maintain its "neutral" stance but adopt a more hawkish tone in its policy commentary. This is likely due to concerns over currency volatility and rising energy costs impacting inflation. Abhishek Bisen of Kotak Mahindra AMC expects the RBI to hold rates steady but adopt a more hawkish tone amid global conflicts, rising crude prices, rupee depreciation, and monsoon risks.
Economic outlook
Projections for inflation, GDP likely to be revised upward
Madan Sabnavis, Chief Economist at Bank of Baroda, also expects the central bank to maintain rates while revising its macroeconomic projections. He anticipates an increase in RBI's inflation forecast toward 5% and a reduction for GDP to around 6.5% from 6.9%. The rupee's depreciation is also likely to be a key discussion point in the policy statement with expectations that the central bank could provide further clarity on managing exchange-rate volatility.
Future predictions
Rate hikes expected by August
With Brent crude trading nearing $100 a barrel, further escalation in US-Iran hostilities could push prices back to three-digit levels. If not in June, market participants expect policy tightening by August, pricing in a 25-basis-point rate hike for Q3. "We now forecast RBI hiking rates by at least 50 bps this fiscal year, bringing the terminal repo rate to 5.75%, and against the backdrop of rupee weakness and a challenging capital inflow picture," Michael Wan, an economist with MUFG said.