The Monetary Policy Committee (MPC) of the Reserve Bank of India is expected to maintain the repo rate, its key lending rate, at 6.5% in its upcoming policy review scheduled for December 6-8. This decision is likely to be driven by a combination of factors, including rising inflationary risks, the recent surge in vegetable prices, and the better-than-expected second-quarter gross domestic product (GDP) growth of 7.6%.
Inflationary Pressures and Monetary Policy Stance
While consumer price-based inflation (CPI) eased to 4.87% in October from 5.02% in September, it remains above the RBI’s target of 4%. Rising food prices, particularly onion and tomato prices, pose an upside risk to the inflation outlook. As a result, the RBI is expected to maintain its stance of monetary policy as “withdrawal of accommodation,” signaling its intention to control inflation.
Economic Growth Prospects and GDP Forecast
The strong July-September 2023 GDP print suggests that the Indian economy is resilient despite global headwinds. The RBI may revise its FY’24 growth estimate marginally upwards, possibly to 6.8%, reflecting the stronger-than-anticipated Q2 growth. However, the RBI is unlikely to revise its headline inflation forecast of 5.4% for the current fiscal, as food inflation is expected to moderate in the coming months.
Implications for Borrowers and Investors
With the repo rate expected to remain unchanged, external benchmark lending rates will also remain stable. This will provide some relief to borrowers, as their equated monthly installments (EMIs) will not increase. For investors, the focus will be on the RBI’s assessment of inflation risks and its willingness to take further action if necessary.
Overall, the RBI’s upcoming monetary policy decision is likely to be a cautious one, balancing the need to control inflation with supporting economic growth. The MPC will closely monitor the evolving economic situation and adjust its policy stance as needed.
