The Reserve Bank of India (RBI) is likely to maintain the current repo rate as inflation appears to be manageable, said investment banking firm Morgan Stanley in a report.
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Morgan Stanley’s report titled ‘India Economics – Macro Indicators Chartbook: Growth Sustains Momentum; Macro stability in Check’, co-authored by Upasana Chachra and Bani Gambhir, states that the interest rates are expected to remain stable throughout 2023, with any shallow rate cut cycle starting from the first quarter of 2024.
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The report suggests that risks of the same may start earlier based on an improving inflation outlook. “We see risks of a shallow rate cut cycle starting earlier based on an improving inflation outlook,” the report also said.
This means, the repo rate, which is the primary benchmark interest rate, will remain at 6.5 per cent. The RBI’s next monetary policy committee meeting is scheduled to be held from June 6-8, 2023.
Morgan Stanley’s forecast states that interest rates will remain steady throughout 2023, considering the expectation of retail inflation to persistently remain below 6 percent.
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The consumer price index-based (CPI) inflation, also known as retail inflation, has been on a downward trend in India, decreasing gradually from its peak of 7.8 per cent in April 2022 to 5.7 per cent in March 2023. The projections suggest a further decline to 5.2 per cent in the final quarter of the 2023-24 fiscal year.
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The headline CPI print for March was in line with expectations. We expect inflation to decelerate more decisively in the quarter ending June, to below 5 percent, supported by favorable base effect and moderating commodity prices,” the report said.
Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline and vice versa.
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The RBI has so far raised the repo rate, the rate at which it lends to banks, by 250 basis points cumulatively since May 2022 in the fight against inflation. As per Morgan Stanley’s report, the RBI’s decision to maintain the current repo rate is a prudent move considering the current inflation outlook.
