Care Edge Predicts Stable Repo Rate Amid Inflation Concerns

Care Edge anticipates the Monetary Policy Committee will maintain a stable repo rate at 6.5%, citing persistent food inflation and recent telecom tariff and fuel price hikes. The credit agency advises caution, urging the RBI to focus on domestic indicators over external influences.

Amid speculation surrounding the Monetary Policy Committee's (MPC) upcoming decision, credit rating agency Care Edge has forecasted a stable repo rate. The firm anticipates the policy stance will remain 'withdrawal of accommodation,' maintaining the repo rate at 6.5%.

The agency cited ongoing inflation concerns, particularly driven by food inflation and a heightened risk due to an above-normal monsoon, as key factors influencing the MPC decision. 'Food inflation has exceeded 6% for the past twelve months, averaging 8%. Further supply-side shocks could sustain high inflation, destabilizing expectations,' the agency noted.

Telecom tariff increases and state sales taxes on fuel are also expected to exacerbate inflation. Recent hikes in telecom tariffs by major providers, ranging from 10-25%, are predicted to heighten core inflation due to telecommunication services' significant weight in the CPI basket. Similarly, recent fuel sales tax hikes in several states and price revisions for aviation turbine fuel and commercial cooking gas are expected to marginally impact inflation.

Care Edge highlighted the importance of the MPC exercising caution and gaining clarity on evolving risks to inflation, especially concerning the food basket, before modifying policy rates or stance. While commodity price declines have alleviated input costs, experts anticipate high food inflation will soon cool, particularly with fresh supplies of short-cycle vegetables.

Excluding vegetables, the CPI rose by just 3.5% year-on-year in June, indicating sector-specific headline inflation. 'Despite external fluctuations, core inflation pressures remain subdued. The RBI should prioritize domestic indicators rather than follow the actions of the Fed or other central banks,' advised Jyoti Prakash Gadia, Managing Director at Resurgent India.

(With inputs from agencies.)