RBI Monetary Policy Committee Begins Meeting, Rates Expected to Remain Unchanged

New Delhi: The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) begins its three-day policy meeting on Monday, with market participants widely expecting the central bank to keep the benchmark repo rate unchanged while maintaining a cautious stance amid evolving domestic inflation dynamics and global uncertainties.

Economists and market experts believe the RBI is unlikely to rush into any change in interest rates despite persistent global headwinds, including elevated crude oil prices and a relatively hawkish U.S. Federal Reserve. Instead, the central bank is expected to remain focused on domestic inflation, liquidity conditions and economic growth while closely monitoring external developments.

Vinay Pai, MD & Head of Fixed Income at Equirus Capital, said the RBI's policy decisions would be driven primarily by domestic macroeconomic conditions rather than closely tracking global monetary policy.

"The upcoming monetary policy will primarily be guided by domestic inflation, liquidity conditions and economic growth rather than mirroring global monetary policy developments," Pai said.

He noted that the U.S. Federal Reserve's hawkish stance has pushed U.S. Treasury yields higher, narrowing the yield differential between Indian and U.S. bonds. While the immediate impact on domestic bond markets has been limited, persistently elevated global yields could moderate foreign portfolio inflows into Indian debt and exert mild upward pressure on government bond yields.

According to Pai, if global yields remain elevated and debt inflows weaken, the RBI is likely to maintain a neutral and cautious policy stance rather than aggressively easing rates. He added that the central bank would also need to ensure adequate domestic and foreign currency liquidity through appropriate measures to maintain orderly financial market conditions.

Mandar Pitale, Head of Financial Markets at SBM Bank (India) Ltd., said the policy review comes against the backdrop of higher crude oil prices triggered by the Iran conflict, which has increased inflationary risks but remains manageable for now.

"Present growth-inflation dynamics point towards risks to growth with a manageable inflation trajectory in the immediate future. This coupled with elevated global uncertainties, may result in MPC not considering the 'rate hike' option in a hurry during the forthcoming MPC meeting in August," Pitale said.

He added that the MPC is expected to deliver cautionary guidance, with global oil prices and the progress of the monsoon remaining key factors influencing future policy decisions. However, he warned that if crude oil prices remain in the USD 90-100 per barrel range for a prolonged period, inflationary pressures could intensify, potentially strengthening the case for rate hikes in the second half of the fiscal year.

Echoing similar expectations, Maulik Patel, Head of Research at Equirus Securities, said the MPC is expected to keep policy rates unchanged in the August meeting.

"We expect the MPC keep policy rates unchanged in the August meeting. We are seeing an uptick in wholesale and retail inflation due to petrol and diesel pump price increases, second order effects, and impact on food due to weather disturbances. CPI for the full year is estimated at 4.9 per cent owing to these pressures and with upside risks," Patel said.

He also pointed to tightening monetary conditions in advanced economies, noting that recent signals from the U.S. Federal Reserve have increased expectations of another rate hike later this year.

Patel said these global developments would remain an important consideration for the RBI while determining the timing of any future policy action, adding that Equirus Securities expects a 25-basis-point rate hike in the December policy review.

At the time of reporting, Brent crude was trading at around USD 83.90 per barrel while crude oil was trading at around USD 80.15 per barrel.