Speaking to Moneycontrol in an exclusive interview, Setty said the current growth-inflation dynamics support a pause in policy action.
“It would be a pause, essentially based on growth-inflation dynamics,” Setty said. While the RBI has projected economic growth of 6.9%, SBI’s internal assessment pegs growth at around 6.6%, while inflation is likely to come in at 4.6%-4.7%, he said.
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The comments come as the RBI’s six-member MPC began its policy meeting on Wednesday, with the rate decision due on Friday.
Setty’s assessment broadly aligns with market expectations. A Reuters poll conducted between May 22 and May 29 showed nearly 80% of economists, or 44 out of 56 respondents, expect the RBI to keep the repo rate unchanged at 5.25% this week. Eleven economists forecast a 25-basis-point increase, while one expected a larger 50-basis-point hike.
India’s retail inflation edged up to 3.48% in April, but remaining below the RBI’s medium-term target of 4% for more than a year, reducing pressure on policymakers to tighten monetary policy immediately.Economists have become increasingly cautious about the outlook as crude oil prices remain elevated following the conflict in West Asia, the rupee has weakened so far this year, and wholesale inflation accelerated sharply in April.
Setty also cautioned that future rate hikes could prove challenging for banks because monetary policy transmission remains incomplete on the deposit side.
“Policy transmission has happened on the loan side, but has not fully happened for many of us on the deposit side,” he told Moneycontrol, adding that banks would have limited room to raise deposit rates without sacrificing margins.
India’s banking sector has witnessed robust credit demand despite the June quarter traditionally being a slower period for lending activity, according to Setty. He said current deposit growth of around 10%-11% remains sufficient to support credit growth of 13%-15%, but higher policy rates could create pressure if banks are forced to reprice deposits.
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While a pause this week remains the base case, economists surveyed by Reuters increasingly expect the RBI to tighten policy later. Most respondents now anticipate at least one 25-basis-point rate increase by the end of next year, compared with expectations in April for no hikes through 2027.
The central bank has already intervened heavily in currency markets to slow the rupee’s decline, though a majority of economists polled by Reuters said monetary policy should not be used as a tool to defend the currency.
For now, investors will focus on whether the RBI maintains its current policy stance or signals growing concern over inflation risks stemming from higher oil prices and external uncertainties.