RBI likely to hold interest rates as inflation stays within target

The Reserve Bank of India (RBI) is expected to keep key interest rates unchanged in its August 4 monetary policy review, prioritising economic growth as inflation remains within the tolerance band. Retail inflation stood at 4.38% in June, largely due to global oil prices, but public sector oil firms absorbed much of the impact.

Mumbai:  The Reserve Bank of India (RBI) is expected to leave key interest rates untouched in its monetary policy review to be announced on August 4 with an eye on promoting economic growth as inflation is seen to be under control, analysts said on Tuesday.

The country’s CPI inflation is currently well within the RBI’s tolerance band of 2 to 6 per cent and the central bank sees the mid-point of 4 per cent of this range as the target to ensure growth with price stability in the economy.

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India’s retail inflation rate touched 4.38 per cent in June which was largely due to the increase in global oil prices and some imported commodities used as inputs in production turning costlier. The public sector oil companies have largely absorbed the increase in crude prices to protect consumers.

RBI Governor Sanjay Malhotra has indicated that the monetary policy review committee would go in for an interest rate hike only if the inflationary pressure becomes more broad-based and not merely driven by temporary supply shocks.

According to the RBI’s economic forecast in June, retail inflation is expected to come in at 5.1 per cent for the fiscal year ending March 31, 2027 while growth is expected to remain at 6.6 per cent. These projections were based on an assumption that crude oil would average about $95 a barrel. Since crude prices have hovered at levels below this price the forecasts are expected to hold.

India has imported more than 50 per cent of its crude oil at discounted prices from Russia in July to reduce dependence on the Gulf which has helped to keep prices within manageable limits. Similarly, the public sector oil companies have switched to the US for more than 70 per cent of their LPG imports.

Some experts were of the view that the RBI should prop up the declining rupee by hiking interest rates to attract more foreign exchange from global investors. However, the RBI’s measures such as scrapping capital-gains tax for foreign holders of Indian government bonds and making dollar deposit schemes for non-resident Indians more attractive have succeeded in attracting close to $40 billion forex inflows to steady the rupee.