RBI is most likely to keep interest rates unchanged on Friday, with chances of an early cut fading after the government warned of a coming heatwave.
The Reserve Bank of India will likely keep its benchmark repurchase rate at 6.5% for a seventh straight policy meeting.
The IMD sees hotter-than-usual temperatures across the country in the three-month period through June, with a high probability of heat wave episodes lasting as long as 10 to 20 days in certain regions. “A heat wave could potentially slow the disinflation process and keep prices of vegetables elevated,” Teresa John, an economist at Nirmal Bang Institutional Equities Pvt, told Bloomberg. “Our base case for interest rate cuts was June, but now August or October seems more likely,” she said.
RBI Governor Shaktikanta Das said he wouldn’t consider easing until inflation settles around the 4% target on a sustainable basis, reducing the chances of an early cut.
The extreme weather outlook could put pressure on the agriculture sector ahead of the Lok Sabha elections in three weeks.
India’s farm sector, which employs close to half of the nation’s working population, contracted 0.8% in the final three months of 2023.
Some economists have pushed back their forecasts for rate cuts to later in the year. Morgan Stanley now expects the easing cycle to begin by October instead of June given India’s better-than-expected growth.
The RBI is trying to rein in inflation while still keeping monetary policy supportive enough for the economy, implying rates will remain stable for now.
Prime Minister Narendra Modi, who’s seeking a third term in office in elections starting in two weeks time, said April 1 that growth should be the central bank’s top priority over the next decade.
The possibility of the US Federal Reserve delaying its rate cuts also gives the RBI a breather. Like other emerging market central banks, the RBI tends to track Fed policy in order to keep its currency stable.