RBI likely to hold Repo Rate, focus on falling inflation trajectory over inflation rate: Economists

Economists at the State Bank of India (SBI) are forecasting that the Reserve Bank of India (RBI) will likely maintain the repo rate, emphasizing the declining inflation trend over the inflation rate itself. 

They point to several factors supporting this expectation:

First of all, the regional spread of the monsoon, which impacts Kharif crop planting and cereal price inflation, coupled with a substantial decline in LPG prices, resulting in a 25 basis point (bps) reduction in the Consumer Price Index (CPI), suggests that retail inflation is approaching the RBI's acceptable range. In August, India's retail inflation eased from a 15-month high recorded in the previous month, primarily due to cooling vegetable prices. The Consumer Price Index (CPI) inflation for August dropped to 6.83% from July's 7.44%.

Secondly, food inflation, which contributes significantly to the overall CPI basket, registered at 9.94% in August, down from 11.51% in July.

However, headline retail inflation remained above RBI's upper tolerance limit of 2-6% for the second consecutive month.

In its August monetary policy, while keeping the repo rate unchanged, had revised its CPI inflation forecast for the July-September quarter of FY24 to 6.2%, up from 5.2%.

Economists anticipate that inflationary pressures will continue to ease in the coming months, potentially bringing it within RBI's tolerance band by September. This scenario suggests that RBI's MPC is likely to maintain the repo rates during its October monetary policy review.

They attribute this easing inflation trend to fiscal policy interventions that have stabilized prices of essential food items like cereals, pulses, and vegetables, contributing to lower retail inflation in August.