India's Central Bank Will Maintain Rates, And Markets Will Be Vigilant For Any Policy Shift

The monetary policy committee (MPC), comprised of three Reserve Bank of India members and three external members, is anticipated to maintain the repo rate (INREPO=ECI) at 6.50 percent for a second consecutive meeting. The 64 economists surveyed by Reuters all anticipate no change.

Since May of last year, the repo rate has been increased by a total of 250 basis points to combat high inflation, which has begun to show symptoms of abating.

Slowing inflation and a robust recovery in economic growth are seen as contributing to the central bank's decision to maintain current interest rates, but worries about a slowdown in global growth and its influence on the domestic economy will be a major concern.

Senior economist at DBS in Singapore, Radhika Rao, stated that the decision to hold rates is likely to be unanimous, whereas the question of whether to maintain the current policy posture, which the RBI refers to as "withdrawal of accommodation," may be more contentious. As inflation has been declining, the committee's dovish members prefer to close the door on further tightening, she said.

Monsoon season rains have just begun in India, and their effect on crops will have a significant bearing on food price trends.

"We anticipate that the stance will be maintained this month as the MPC prefers to remain in a wait-and-see mode to assess the impact of weather conditions on the price trend prior to considering a pivot to easing," Rao said.

The commentary regarding domestic liquidity and the central bank's liquidity management operations over the past few weeks will also be of interest to bond market participants, as interbank rates have risen intermittently despite a general surplus of cash in the financial system.

Rao stated that they do not anticipate any significant changes to the current course of action, which is to provide support through transient repo operations as opposed to more permanent measures.

Indian markets are unlikely to react significantly if rates and posture are maintained, but a change in stance could spark a bond and stock market rally and boost the rupee.

"It is unlikely that the RBI will reverse its course of rate hikes before the Fed," said Madhavi Arora, chief economist at Emkay Global, adding that the RBI may soften its tone.