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RBI may not change interest rates in next meeting: Report


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The Reserve Bank of India’s (RBI) monetary policy committee is anticipated to maintain the current interest rates for the eighth consecutive time. The committee is scheduled to meet between June 5 and June 7. This decision is expected to be influenced by various factors, including the outcome of the recently conducted exit polls.

Impact of Exit Polls on Bond Yields and Rupee

If the exit polls are accurate and indicate a possible victory for the ruling National Democratic Alliance (NDA), it is expected to result in lower bond yields and a stronger Indian rupee. This outcome could bring a sense of calm to investors, as political and policy continuity would be viewed positively in the short term, supporting risk assets and macro stability in the medium term. The foreign exchange and rates markets are likely to respond positively to this outcome, and the RBI may face the challenge of managing ample liquidity.

Policy Focus and Outlook for Rupee and Bonds

Madhvi Arora, the lead economist at Emkay Global, suggests that the policy focus will continue to align the rupee with other emerging market peers in Asia. Additionally, long positions on bonds are expected to be buoyed. Arora predicts that the government securities (G-Sec) curve will experience a bull steepening in the coming months.

MPC’s Approach and Factors Influencing Decision

Apart from waiting for inflation to come within the target range, the Monetary Policy Committee is expected to adopt a wait-and-watch approach until the Union Budget for FY25 is finalized in July. One key uncertainty the committee faces is whether the government will reduce the fiscal deficit and trim its borrowing program due to the record dividend announced by the RBI or if it will choose to spend the money.

Expert Perspectives on RBI’s Decision

Shreya Sodhani, a regional economist at Barclays, suggests that the recent economic growth has outpaced RBI’s expectations. Therefore, the central bank may not feel an immediate need to cut interest rates. Sodhani believes that the Monetary Policy Committee will likely vote 5-1 to maintain the current policy mix at its upcoming meeting. Barclays does not expect the RBI to reduce rates before the fourth quarter of 2024, considering the bank’s inflation trajectory and the persistent upside surprises in economic growth.

Strong Growth Momentum and its Impact on RBI’s Decision

The strong momentum in economic growth, as indicated by the GDP numbers for the fourth quarter of FY24 at 7.7%, with an overall growth rate of 8.2% for the fiscal year, is a significant factor that would prompt the RBI to retain the status quo and keep interest rates unchanged. This positive growth trend reinforces the rationale for maintaining the current monetary policy stance.

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