India Rate Setters Seen Extending Pause to Fight Food Inflation

India’s central bank is expected keep its benchmark rate and policy stance unchanged for a third consecutive meeting to support growth while food inflation accelerates in Asia’s third largest economy.

(Bloomberg) — India’s central bank is expected keep its benchmark rate and policy stance unchanged for a third consecutive meeting to support growth while food inflation accelerates in Asia’s third largest economy.  

All 42 economists in a Bloomberg survey forecast the Reserve Bank of India’s six-member monetary policy committee will keep the repurchase rate unchanged at 6.50% on Thursday. Policymakers are keeping an eye on the likely occurrence of El Nino, which brings drier weather conditions and can affect crop yields.  

The RBI is likely to retain its “withdrawal of accommodation” stance introduced in April last year, according to 19 of 20 economists who shared their forecast on the stance, only one economist expected the change in language.

“We expect the RBI to look through the surge in food inflation, take comfort from declining core inflation, keep the policy repo rate unchanged in calendar 2023, and continue with hawkish guidance,” said Goldman Sachs economist Santanu Sengupta.  

Surging food prices due to weaker monsoon rains in some parts of India and floods in other regions, drove retail inflation to a three-month high of 4.81% in June. Economists see price gains breaching the RBI’s 2%-6% target range last month on high vegetable prices and rising costs of rice and wheat — a staple in Indian diets. 

As a result, swap pricing is showing traders pushing back rate-cut bets deep into next year, with some of them even assigning an outside chance of a rate hike in the coming policy meetings. 

Here’s what to watch when Governor Shaktikanta Das announces the decision on Thursday at 10 a.m. in Mumbai, and holds a press conference at noon:


High frequency indicators, including services PMI and tax collections, are showing the Indian economy remains buoyant, giving the central bank some room to focus on fighting inflation. But with elections coming up next year, the RBI will need to keep the growth momentum going. 

Crude prices are also climbing, making imports costlier for the world’s third-largest consumer of oil. The crude oil basket has averaged $85.76 a barrel in August, according to oil ministry data, the highest since November last year. 

Food and fuel inflation could weaken consumer demand by squeezing incomes, reinforcing for the central bank the need to guard against potential second-round effects of rising prices. 

“RBI will probably have no choice but to raise their average fiscal year 2023-24 inflation forecast of 5.1% by about 30 basis points,” said Citigroup Inc. economist Samiran Chakraborty. The central bank’s growth forecast for India could be left unchanged at 6.5% for the year, he said. 


Inflation should settle at around the 4% midpoint on a more durable basis, Das said in his June policy statement. Economists are watching to see if this still holds and whether the central bank chief will give any hints on the future rate path. 

RBI policy could be seen to have a “dovish” slant if the central bank commentary indicates the current spike in vegetable prices is temporary, Citi’s Chakraborty said. It may turn “hawkish” if there are signals that repeated supply shocks require monetary policy action, he added. 

A shift to an easier policy is tricky for the RBI as it has to factor in rising borrowing costs by the US Federal Reserve and Bank of England as they work to curb price pressures.

What Bloomberg Economics Says  

We expect the Reserve Bank of India to hold its key rate at 6.5% at its Aug. 10 meeting. Some investors are concerned the central bank might resume tightening given the upswing in inflation since the last review and a narrowing in the US-India rate gap following the Federal Reserve’s July hike. But we think the RBI will prioritize signs of a stalling recovery at home and wait to see whether inflation’s resurgence is temporary.

— Abhishek Gupta, India economist

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Bond Markets

Economists have pushed back rate easing prospects to April-June quarter next year from Jan.-March on the food price surge, a separate Bloomberg survey showed.

“The one-year overnight index swaps is now pricing in a significant probability of an additional rate hike sometime later this year,” said Suyash Choudhary, head of fixed income at Bandhan Mutual Fund.

Traders see a limited scope for any immediate rally in Indian bonds. Yields have been on a uptick since sliding below 7% in the past few months.

“India bond yields should remain in a high range,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. There’s little room for the rate setters to signal easier policy, he added.  

–With assistance from Tomoko Sato.

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