A weaker mandate for the National Democratic Alliance, headed by the governing Bharatiya Janata Party, has, however, sparked worries about a possible slower rate of budget contraction combined with more social expenditure.
In the face of strong economic growth and an unpredictable inflation forecast, the Indian central bank is largely likely to maintain its tighter monetary policy and hold interest rates constant at its policy review on Friday.
A weaker mandate for the National Democratic Alliance, headed by the governing Bharatiya Janata Party, has, however, sparked worries about a possible slower rate of budget contraction combined with more social expenditure.
In the medium to longer term, such a situation may be risky for India's inflation and monetary policy outlooks.
The chances for fiscal consolidation are still there, but Moody's ratings informed Reuters that the rate of debt reduction may decrease in the aftermath of the election results.
At the end of its June 5-7 meeting, the Monetary Policy Committee (MPC) of India was anticipated by all but one of the seventy-two economists surveyed in a Reuters poll conducted on May 17–30 to maintain the repo rate at 6.50%. The majority of economists think that the current monetary cycle's peak is around 6.50%.
Macrofundamentals form the basis of RBI's viewpoint. It is anticipated that the RBI would continue to pause given that inflation is still higher than objective. Strong economic circumstances provide policymakers room to continue focusing on inflation, according to IDFC First Bank chief economist Gaura Sen Gupta.
The policy rate was increased to 6.5% in February 2023, the last time the MPC altered rates. Despite slowing down from a 4.85% rise in March to a 4.83% increase in April, annual retail inflation was still significantly higher than the MPC's medium-term objective of 4%.
"We anticipate that the MPC will continue its rate pause in June, maintaining its current policy stance," DBS Bank economist Radhika Rao said in a statement from Singapore.
"An 8% GDP growth print, above-target inflation and concern over the U.S. Fed's direction is expected to keep the RBI MPC confident in its stance at this juncture," she said.
The economy of the South Asian country grew at a faster-than-expected rate of 7.8% in the March quarter, according to GDP figures released last week, bringing its annual growth to 8.2%.
Even while markets have generally priced in a "no surprise" policy on Friday, a few experts think there is a remote possibility that the policy would shift to a neutral posture.
Bond rates are predicted to decrease in the event that the MPC does shift from a "withdrawal of accommodation" posture to a "neutral" one, raising the possibility of an early rate drop.
"We think that the committee will lay a foundation for regulatory easing by officially changing its policy stance," Capital Economics said.
"We believe the easing cycle will start in August, and we anticipate a few more rate cuts by year's end than the market is projecting."
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