The Reserve Bank of India‘s three-day Monetary Policy Committee (MPC) meeting has begun today. The meeting will conclude on June 5, when the RBI Governor will announce the policy decision, including any action on interest rates.
The June policy review comes at a time when inflation risks have increased due to rising crude oil prices, rupee weakness and the possibility of a weak monsoon. As a result, economists and markets are closely watching the RBI’s announcement. The central bank is mandated to keep inflation at 4%, with a tolerance band of 2 percentage points on either side.
RBI expected to focus on liquidity, not rates
Nuvama Institutional Equities noted that “rising inflation would typically call for policy tightening”. However, the brokerage expects the RBI to remain on hold as weak demand conditions and slowing growth are likely to outweigh inflation concerns.
“Demand conditions are far from robust, oil shock itself is demand-reducing and bond yields have already hardened,” the brokerage said.
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Nuvama expects the RBI to adopt a wait-and-watch approach and keep the repo rate unchanged at 5.25%. It also believes the central bank is likely to focus on liquidity management rather than changing interest rates in the June policy review.
RBI to retain growth estimates: Nuvama
Nuvama believes the RBI’s commentary and forward guidance will be more important than the policy decision itself.
“Policymakers may revise their inflation forecast higher, but refrain from lowering their growth projection for now,” Nuvama noted.
Higher fuel costs may push FY27 inflation above RBI forecast : Yes Bank
Yes Bank believes the RBI may have to raise its FY27 inflation forecast from the earlier estimate of 4.6%.
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A report by Yes Bank also expects the RBI to wait for greater clarity on whether current inflationary pressures are temporary or more persistent.
The bank said the cumulative 7.4% increase in petrol prices and 8.4% increase in diesel prices could significantly affect retail inflation through higher transportation and logistics costs.
It estimates a direct impact of around 40 basis points on inflation, along with an indirect impact of 25-30 basis points.
The rise in commercial LPG prices has already started reflecting in restaurant service costs, while higher manufacturing input costs are likely to be gradually passed on to consumers.
For now, Yes Bank expects headline CPI inflation to average around 5.0% in FY27. It projects inflation at 5.6% in Q3FY27 and 4.9% in Q4FY27.
The bank also flagged the risk of food inflation due to forecasts of a weaker monsoon linked to El Nino conditions.
Conclusion
The RBI in its previous meeting in April, kept the repo rate unchanged at 5.25% and retained its ‘Neutral’ stance. Economists expect RBI to keep the repo rate unchanged in this meeting as well before hiking the rate in its further meetings.
TOPICSECONOMYinflationRBIRBI Monetary Policy ReviewReserve Bank of India + 0 MoreThis article was first uploaded on June three, twenty twenty-six, at eleven minutes past one in the afternoon. © IE Online Media Services (P) Ltd