Source : INDIA TODAY NEWS
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) begins its three-day meeting today against the backdrop of rising global inflationary pressures, higher crude oil prices and a growing list of central banks that have opted to raise interest rates over the past few months.
Yet, unlike many of its global peers, economists expect the RBI to hold the repo rate steady this week, betting that domestic inflation remains under control despite mounting external risks.
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According to a Reuters poll, 68 of the 72 economists surveyed expect the RBI to leave interest rates unchanged when Governor Sanjay Malhotra announces the policy decision on Wednesday.
While a rate hike is widely seen as unlikely this week, economists believe the central bank could adopt a more hawkish tone as inflationary pressures gradually build.
WHY IS INDIA LIKELY TO TAKE A DIFFERENT PATH?
Since the outbreak of the US-Israel conflict involving Iran five months ago, several central banks, including those in Europe, Australia, Indonesia, the Philippines, Singapore, South Korea and South Africa, have raised benchmark interest rates in response to higher inflation risks.
The US Federal Reserve and the Bank of Japan, however, have also kept rates unchanged.
India finds itself in a relatively comfortable position.
Retail inflation rose to 4.38% in June, crossing the RBI’s 4% target for the first time in 17 months. However, it remains comfortably within the central bank’s tolerance band of 2% to 6%.
Core inflation, which excludes volatile food and fuel prices, has also stayed close to 4%, giving policymakers flexibility to wait for more data before considering any rate action, according to economists surveyed by Reuters.
Samiran Chakraborty, Citi’s Chief India Economist, said core inflation remains within the RBI’s comfort zone.
“Although core and underlying inflation have risen modestly, they remain within the RBI’s comfort zone. Consequently, a rate hike is unlikely in 2026 unless core inflation sustains above 4.5%,” he said.
WHAT COULD CHANGE RBI’S STANCE?
Even though the RBI is widely expected to maintain status quo this week, economists believe the central bank’s language could become more cautious.
Wholesale inflation surged to 9.87% in June, while a central bank survey conducted in May showed inflation expectations among households have also started rising.
Higher crude oil prices following renewed geopolitical tensions in the Gulf have further added to concerns over imported inflation.
Tanay Dalal, Economist at Axis Bank, expects the MPC to acknowledge these risks while remaining data dependent.
“The MPC is likely to shift language acknowledging risks of firmer inflation and policy action ahead, while maintaining a data-dependent approach,” he said.
He added that wholesale price pressures could begin feeding into retail inflation over the next three to four months, gradually reducing the RBI’s room for flexibility.
PRESSURE FROM THE RUPEE
Another challenge facing the RBI is the rupee.
Ahead of the June monetary policy, the Indian currency had slipped to a record low, prompting calls from some economists for a rate hike similar to those undertaken by countries such as Indonesia and the Philippines to support their currencies.
Instead of increasing rates, the RBI introduced measures to attract foreign capital, including removing capital gains tax for foreign investors in government bonds and making dollar deposit schemes for non-resident Indians more attractive.
According to Reuters, these measures have helped attract nearly $40 billion in inflows, providing temporary support to the rupee.
However, renewed pressure from rising oil prices has once again weighed on the currency.
Trinh Nguyen, Senior Economist for Emerging Asia at Natixis, believes the RBI may eventually have to tighten policy if these pressures persist.
“If you compare India to similarly rated markets, it’s not the most compelling story from a real yields perspective,” Nguyen said.
“Fundamentally, I think the right call for India is higher rates. They are not going to do it this week but the longer they wait, the more they will be pushed to it.”
Interest-rate swap markets are already pricing in roughly 75 basis points of rate hikes over the next 12 months, suggesting investors expect policy tightening eventually.
WHAT DOES THIS MEAN FOR HOMEBUYERS?
For borrowers, particularly homebuyers, an unchanged repo rate would mean relief.
A status quo would help keep home loan rates stable, offering certainty to both existing borrowers and prospective buyers at a time of heightened global uncertainty.
Pradeep Aggarwal, Founder and Chairman of Signature Global, said domestic inflation remains within the RBI’s manageable range, giving the central bank enough room to maintain policy stability.
“The housing sector has been witnessing healthy demand, supported by lower home loan rates, improving affordability, and strong consumer confidence. Maintaining this supportive policy stance will help sustain housing demand and continue contributing meaningfully to India’s economic growth,” he said.
Umesh Gowda H A, Chairman and Founder of Sanjeevini Group, echoed similar views.
“The upcoming RBI Monetary Policy Committee meeting comes at a time when the global economy is grappling with heightened geopolitical tensions, persistent supply chain disruptions and renewed inflationary pressures. While a status quo on the repo rate appears to be the most prudent approach, the central bank’s commentary on inflation and liquidity will be equally important,” he said.
Mukesh Choudhary, Managing Director of Accuspace, said policy consistency is particularly important during uncertain times.
“We expect the MPC to adopt a wait-and-watch approach. Such a stance would reassure both domestic and foreign investors who value policy consistency during uncertain times,” he said.
Ankur Jalan, CEO of Golden Growth Fund, also expects the RBI to adopt a cautious approach.
“In this environment, we expect the RBI to adopt a cautious and calibrated approach, with a status quo on policy rates being the most likely outcome,” he said.
Lalit Parihar, Managing Director of Aaiji Group, said preserving macroeconomic stability should remain the central bank’s priority despite calls for lower borrowing costs.
“A measured policy stance will reinforce investor confidence and ensure that financing costs remain predictable,” he said.
While markets overwhelmingly expect the RBI to keep the repo rate unchanged, investors will closely watch three things:
Whether the RBI turns more hawkish on inflation.Its outlook on crude oil and imported inflation.Any hints on the timing of a future rate hike if inflationary pressures continue to build.
With global central banks increasingly opting for tighter monetary policy, the RBI may continue to hold rates steady this week—but its guidance could offer the clearest indication yet of whether India’s rate cycle is approaching a turning point.
– Ends
SOURCE :- TIMES OF INDIA
