India Monetary Policy June 2023

India: Reserve Bank of India errs away from pivoting in June amid the arrival of El Niño

On 8 June, the Reserve Bank of India (RBI) left the repo rate unchanged at 6.50%, as expected by the market. It also left its standing deposit facility rate and marginal standing facility rate unchanged at 6.25% and 6.75%, respectively. All board members voted for the decision.

In justifying its decision, the RBI noted that inflation decelerated to within the 2.0–6.0% target band in March and April, and that the domestic economy remains robust. In addition, the RBI lowered its inflation forecast for FY 2023 from 5.2% to 5.1%.

The RBI also opted to keep its policy stance focused on the “withdrawal of accommodation”, despite growing speculation that the Bank would pivot toward a more accommodative monetary policy stance. The arrival of El Niño, declared in early June, likely helped persuade the RBI to retain its hawkish stance. Governor Das mentioned the weather pattern, which tends to reduce monsoon rainfall in India and thus hurt agricultural supply, at least six times in his post-decision remarks. Only 7 of the 21 economists polled by FocusEconomics expect the RBI to lower the policy rate this year. The key factor to watch ahead will be the strength of El Niño.

The next monetary policy meeting is scheduled to take place on 8–10 August.

Analysts at Nomura commented on the outlook:

“We expect another pause in August. As growth disappoints, a pivot to rate cuts is likely from this October, with 75bp of cumulative cuts in H2 FY24.”

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