Can an uptick in inflation, a US Fed hike push RBI to hike rates on August 10?

The recent sharp rise in vegetable and pulses prices and the July rate hike by the US Fed are the two major questions that the MPC will take into account before deciding on policy rates.

However, experts believe the RBI will maintain a status quo on rates and stance on August 10. 

According to a Mint survey of 10 economists, RBI MPC is likely to leave interest rates and policy stance unchanged at its meeting this week. All economists expect MPC to keep the repo rate unchanged at 6.5 per cent and retain the stance of withdrawal of accommodation. 

While the majority expects RBI to maintain a prolonged pause after the August policy, the market is pencilling in a 50 per cent chance of 25 basis points (bps) hike over the next two RBI meetings.

Read more: RBI rate, stance to stay on pause: Poll

Wait and watch

The RBI may want to wait for the next few months to observe the evolving trend of inflation before going for rate hikes. 

Apurva Sheth, Head of Market Perspectives & Research at SAMCO Securities believes the RBI will keep the benchmark repo rates unchanged yet again in the upcoming monetary policy meeting scheduled on 10 August despite the recent uptick in inflation and the US Fed rate hike in July-end.

“Inflation has witnessed an uptick from 4.31 per cent to 4.81 per cent. Monsoons have also led to a jump in food prices. Apart from this, the US Fed has also increased its interest rates to a 22-year high of 5.5 per cent. India 10 Year bond yields have jumped close to the key resistance of 7.2 per cent. This indicates that the probability of RBI hiking rates has gone up. However, we believe that it’s too soon for RBI to make any changes. We believe that for the time being RBI would apply a ‘wait and watch’ approach on both interest rates and stance,” said Apurva Sheth, Head of Market Perspectives & Research at SAMCO Securities.

Deepak Agrawal, CIO- Fixed Income at Kotak Mahindra Asset Management Company, believes the Q2FY 24 inflation (July-Sep 2023) may be a little over 6 per cent as against the RBI forecast of 5.2 per cent. This is due to a sharp spike in vegetable prices, particularly tomatoes.

However, he does not expect any spillovers from food inflation to core inflation, as the price rise is temporary.

“Core CPI inflation is expected to remain steady at nearly 5.1 per cent for the rest of FY 2024. This should be a source of comfort for the RBI. We expect RBI to keep rates unchanged and continue with the ‘withdrawal of accommodation’ monetary policy stance,” said Agrawal.

All eyes will be on what the RBI thinks about India’s inflation and growth trajectory.

Read more: RBI MPC may maintain the status quo on August 10; comment on inflation, growth trajectory to be in focus

Many experts now believe that investors should focus more on market fundamentals instead of RBI MPC outcomes. They point out the robust outlook of the Indian market with the potential of giving high returns in the medium to long term.

G. Chokkalingam, Founder & Head of Research at Equinomics Research underscored that fast economic growth, robust foreign capital inflow and macroeconomic tailwinds like capex plans of government and private sector, etc., make India’s medium to long-term story appealing.

“Investors should focus valuation of individual stocks and build a long-term portfolio rather than worrying about the interest rate policy of the RBI,” said Chokkalingam.

Read more: Why you should look beyond RBI and focus on stock market fundamentals

Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before taking any investment decisions.

Updated: 08 Aug 2023, 10:04 AM IST