RBI MPC: Expect no rate hikes, oil holds key to inflation, future guidance

Shanti Ekambaram

During the February review, the Reserve Bank of India (RBI) kept the key interest rates unchanged and committed to an accommodative stance for as long as it is necessary to see stable growth. This was despite inflation being high and high frequency data showing economic growth trends. This time, as the monetary policy committee (MPC) of the RBI meets from April 6-9, the situation has become more challenging due to the Russia-Ukraine crisis. Crude price is significantly higher, inflation is showing an uptick over the target level and is likely to be higher due to fuel price hikes; and there are supply side shortages, among other things.

Balancing growth amid surging inflation and maintaining an accommodative stance will thus be a challenge for the MPC. They had clearly said in the last policy that they will communicate clearly and provide guidance on any change in stance going forward. In this policy, I expect some guidance on liquidity and the rate trajectory going forward.

Inflationary pressures

While crude oil prices were at $ 91.4 on the day when the last policy was announced (February 10), due to the Russia-Ukraine war, oil has crossed multi-year highs, peaking at nearly $ 140 a barrel recently. India is a net importer of oil. Every $ 10 rise in oil price increases our current account deficit by $ 17 billion. We have already seen five-six fuel price hikes. Prices of commodities have risen and all of this will lead to pressure on inflation. I expect the MPC to revise its inflation target for this fiscal and possibly lower growth targets.

Macro risks

External sector risks abound. In 3QFY22, balance of payments expectedly fell sharply led by a widening of trade deficit and moderation in capital inflows. The current account registered a deficit of $ 23 billion in 3QFY22, widening from a deficit of $ 9.9 billion in 2QFY22 and a deficit of $ 2.2 billion in 3QFY21. The capital account balance moderated to $ 23 billion mainly due to FPI outflows of $ 5.8 billion, lower FDI inflows and external commercial borrowing flows. The comfortable FX reserves of $ 617,648 billion will provide buffers but we are likely to see currency volatility.

No worries on pandemic

The pandemic has now become an endemic at least in India, even as countries like China and South Korea have seen a resurge in the number of cases. Considering the above, I do not expect a change in key rates during this policy. Keep a watch on the MPC’s narrative on growth, inflation and interest rates. Global growth and the monetary policy landscape will be affected by the dynamic geopolitical factors. The central bank is likely to skillfully respond to address the key macroeconomic issues.

The writer is group president – consumer banking, Kotak Mahindra Bank. The views expressed are personal.

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