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RBI Rate Hold: Cautious Stance Amid Global Woes
31 May
Summary
- RBI expected to keep policy rate at 5.25% on June 5.
- Experts anticipate a cautious monetary policy stance.
- External challenges may lead to higher inflation forecasts.
The Reserve Bank of India's Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, is set to announce its decision on June 5, following a three-day deliberation. Experts widely predict that the key policy rate will remain unchanged at 5.25%.
The central bank is expected to adopt a cautious stance, carefully considering the potential impacts of ongoing West Asia turmoil on inflation and economic growth. Surging energy prices, persistent supply chain issues, and a depreciating rupee are primary external challenges.
Some analysts suggest the RBI might increase its inflation forecast and decrease its GDP growth estimate during the bi-monthly monetary policy meet. The SBI's economic research department anticipates a status quo, with inflation possibly exceeding 5% for the next three quarters.
Madan Sabnavis, Chief Economist at Bank of Baroda, agrees that the repo rate and stance are unlikely to change, but expects a cautious, hawkish tone. He anticipates an upward revision of inflation forecasts towards 5% and a downward revision of GDP growth closer to 6.5%.
Recent reports from the RBI indicate a review of GDP growth and inflation forecasting for the current financial year. The outlook for the Indian economy in 2026-27 remains positive, though prolonged West Asia conflict poses a downside risk. Inflation in 2026-27 is projected to align with the target, contingent on factors like foodgrain stocks and reservoir levels.
However, potential upside risks to inflation include spikes in global fuel and commodity prices due to geopolitical tensions. The government's headline inflation target remains at 4% with a tolerance band of 2-6%. Experts from Crisil and ICRA also foresee a continuation of the current rates and a neutral policy stance, emphasizing close monitoring of supply-side pressures and El Nino's impact on monsoons.
Market expectations currently price in a potential rate hike, but recent RBI actions suggest a preference for liquidity management. A sustained macro stress or crude prices above $100 per barrel for an extended period could prompt a rate hike by August, though this is not the base case.
