The Reserve Bank of India (RBI) announced that there would be no change in the repo rate during its monetary policy meeting held on June 8. The RBI has maintained the repo rate at 6.5 percent. Deepak Jasani, Head of Research at HDFC Securities, suggests that there is no expectation of a repo rate cut from the RBI before February 2024. Liquidity surplus remains in place, and it has increased further since the discontinuation of the ₹2,000 notes.

No Change in Repo Rate Due to These Reasons

According to Deepak Jasani, it is not feasible to make changes to the repo rate based on liquidity conditions at the moment. Despite the forecast from 12 months ago, the Consumer Price Index (CPI) still remains above the target of 4 percent. Continuous improvements in inflation can indicate a shift in the general situation. However, the market remains divided on the future actions of the Federal Open Market Committee (FOMC). We believe that the current situation will persist until there are external changes or an El Niño-like scenario.

Inflation Decreases Due to Lower Food Prices

India’s retail inflation rate, measured by the Consumer Price Index, has declined to 4.7 percent due to a reduction in the prices of food and beverages. It could further decrease based on the trends observed in May. The high base effect may continue for a few more months, resulting in increasing inflation. The Indian Meteorological Department (IMD) has predicted a 96 percent probability for normal monsoon conditions in the long term. However, there is a strong possibility of the development of La Niña in the post-monsoon period. La Niña has not been a direct cause of rising inflation in recent times. Additionally, reductions in oil production by OPEC countries and the impact of geopolitical issues on global commodity prices may affect inflation.

RBI Revises its Inflation Forecast

There has been a rapid decline in input prices. Wholesale Price Index (WPI) is below zero, indicating the possibility of softening Consumer Price Index (CPI). Inflation has also reduced in the services sector. RBI is cautious considering the situation of La Niña in 2023. For the fiscal year 2024, RBI has revised its inflation forecast to 5.1 percent, which is 10 basis points lower. Furthermore, reduced external demand and uncertain financial conditions will lead to a real GDP growth of up to 6.5 percent in the financial year 2024. We consider weak global development, the impact of RBI’s rate hike, and the development of La Niña during the monsoon season as significant risks for overall domestic production growth.

Inflation in All Countries

Deepak Jasani suggests that inflation has decreased in all countries; however, it is still higher than the target. It will take a considerable amount of time for the interest rate to decrease from high levels, posing challenges for central banks in emerging markets. The RBI Governor has focused on achieving a 4 percent inflation rate in his statement.