RBI IS EXPECTED TO MAINTAIN CURRENT INTEREST RATES

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The Reserve Bank of India (RBI) is widely anticipated to maintain its current interest rates for the fourth consecutive time this week, given the recent moderation in inflation and the tight liquidity conditions that have driven up money market rates.

The RBI’s monetary policy committee (MPC) is set to commence its three-day meeting this Wednesday, and it is expected to leave the policy repo rate unchanged at 6.50 percent.

In August, retail inflation eased to 6.8 percent from 7.4 percent in the previous month, primarily due to lower vegetable prices resulting from government interventions and the arrival of fresh harvests. Further moderation in inflation is anticipated in September.

Economists believe that despite the rise in crude oil prices, they are unlikely to significantly impact retail inflation, although the central bank remains cautious about the persistent price pressures in items like cereals and pulses.

Rajani Sinha, Chief Economist, and Sarbartho Mukherjee, Senior Economist at CareEdge, noted that high-frequency retail data indicates a softening in vegetable prices, which is expected to further alleviate headline inflation. However, they highlighted that price pressures continue in cereals, spices, and pulses.

While the expected moderation in inflation is one reason for the RBI to refrain from raising the repo rate, the increase in money market rates due to tight liquidity in the banking system is another key factor behind the decision to maintain rates. For example, overnight call money rates have risen from nearly 6.30 percent in August to around 6.80 percent.

The liquidity tightness can be attributed to outflows resulting from tax and GST payments, as well as the RBI’s intervention in forex markets, which absorbs rupee liquidity. In essence, interest rates have risen without any official rate hikes.

Madan Sabnavis, Chief Economist at Bank of Baroda, expects the RBI to maintain the current rates, stating that despite the expected sharp decline in inflation in September and October, there is still some concern about the kharif output, particularly regarding pulses, which has the potential to push prices higher. However, given the downward trajectory of inflation, a rate hike is unlikely.

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