The three-day meeting of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) is underway and it will conclude on Thursday (August 10). Dalal Street investors are keeping a close eye on the Reserve Bank of India’s monetary policy outcome which will be announced tomorrow. However, experts believe the RBI will maintain a status quo on rates and stance.
Food price spikes in India, typical at the onset of the monsoon, drove up headline inflation in June, corroborating the MPC’s view that the fight against inflation is far from over, the Reserve Bank of India (RBI) said in its bulletin last month.
The rise in food prices, however, has been sharper than expected this year and is seen lasting longer.
Morgan Stanley expects India’s retail inflation to leap to 6.2 per cent at the end of the quarter ended September, against its previous forecast of 5.5 per cent, due to higher food inflation. The Consumer Price Index (CPI) based inflation is, however, expected to moderate to a 5-6 per cent range during the second half of FY24.
After raising the repo rate by 50 basis points in the previous three policy actions, the central bank is expected to reduce the quantum of hike this time to 30-35 bps.
“The upcoming MPC policy will see the RBI reiterating caution amid a spike in perishable food prices, even as easing core inflation and possible mean reversion in food price trends in Q4CY23 would keep the RBI on hold, with a focus on the durable elements of inflation,” said Madhavi Arora, Lead Economist at Emkay Global Financial Services.
How Will The Dalal Street React?
As far as the domestic equity market, a rate hike of 30-35 bps has been largely discounted by investors. Therefore, no major movement in equities is expected if the rate action is on the expected lines.
Economists at the State Bank of India (SBI) also expect the RBI to maintain the pause mode in the August policy but the chances for a change in stance are minimal.
If the rate action is accompanied by a dovish tone of the central bank, it will bolster sentiment and take markets to new highs.
“We expect a 35 bps hike in the December policy, along with a change in monetary policy stance from “withdrawal of accommodation” to “neutral”, indicating further action to be data-dependent,” said Deepak Agrawal, chief investment officer – debt fund – at Kotak
What RBI policy outcome means for rate-sensitive sectors?
Santosh Meena, Head of Research, Swastika Investmart Ltd, explained that “Ahead of the policy, rate-sensitive sectors such as banking, NBFCs, real estate, auto, and infrastructure are likely to remain in focus. While the market is expecting a status quo in the repo rate, it will be keen to hear the RBI’s assessment of the inflation trajectory and the outlook for growth. Any hint of a hawkish stance from the RBI could weigh on sentiment in these sectors. Stocks like DLF, Godrej Properties, and M&M Finance may remain volatile on policy day.”
However, experts say that if the RBI’s policy action and commentary are dovish, then the rise of the Nifty 50 to 18800-19000 levels is likely to be driven by rate-sensitive sectors such as automobiles and banks.
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