The Reserve Bank of India (RBI) will leave interest rates unchanged for the ninth consecutive meeting in August owing to stubbornly high inflation, with a small majority of analysts in a Reuters poll expecting the first rate decrease next quarter.
A strong increase in food prices pushed inflation in Asia's third-largest economy to a five-month high of 5.08% in June, considerably over the RBI's medium-term objective of 4%, implying that the central bank will be cautious about normalizing monetary policy too soon.
With GDP growth of about 8% in recent years - the fastest among major international countries - and inflation unlikely to dip below 4% anytime soon, the RBI has no motive to hasten an interest rate decrease.
In the most recent Reuters poll, all 59 analysts expected that the RBI will keep the repo rate at 6.50% at the end of its August 6-8 meeting. It was the first rate survey conducted after the July 23 budget, in which the government maintained borrowing objectives in control.
"We still predict the RBI will leave rates on quo at its forthcoming meeting...but expect the first rate drop in Q4. "With the headline number rising again in June, inflation remains too high for policymakers to consider a dovish move just yet," said Alexandra Hermann, chief economist at Oxford Economics.
"Given economic growth momentum is still strong, the RBI faces less of a trade-off between inflation and growth and can hence keep interest rates higher for longer to rein in inflation without risking to cause cracks in the economy."
A separate Reuters poll projected that inflation would average 4.5% this fiscal year and next. It has been over the central bank's midpoint objective of 4.0% for nearly five years. All respondents predicted that any easing would come after the Federal Reserve's first rate cut, which is scheduled in September.
The poll's consensus projection indicated a first decrease of 25 basis points to 6.25% next quarter, a stance held since May, and more dovish than financial markets, which expect no reduction this fiscal year, which ends in March 2025.
A 57% majority predicted a first decrease in Q4, but there was no consensus on where the repo rate would conclude the year.
Almost half of the economists polled (25 out of 54) anticipated 6.25% by the end of the year, while 23 predicted 6.50%, five predicted 6.00%, and just one predicted 6.35%. While a smaller percentage of forecasts predicted rate cuts well into next year, medians showed no reductions greater than 6.00%.
All respondents predicted that any easing would come after the Federal Reserve's first rate cut, which is scheduled in September.
"We still need to see how things play out because a September cut by the Fed does not always imply an October cut by the RBI," said Kunal Kundu, India economist at Societe Generale. "If the growth potential is stronger, there is less need for the RBI to lower the policy rate."
