RBI to keep rates unchanged as US-Iran war fuels inflation
What's the story
The Reserve Bank of India (RBI) is likely to keep key policy rates unchanged in its upcoming Monetary Policy Committee (MPC) meeting, scheduled for April 6-8. This prediction comes from a report by SBI Research, which cites heightened global uncertainty due to the ongoing West Asia conflict. The report highlights that this will be the first policy review since the outbreak of this conflict.
Market instability
War's impact on global energy markets
The SBI Research report notes that the ongoing war has "plunged the entire world into chaos," with global energy markets being a major concern. It highlights that the "de facto closure of the Strait of Hormuz... has produced the largest disruption to the global oil market in its history since 1973." The report warns India isn't immune to these developments, as rising crude oil prices are pushing up imported inflation.
Inflation concerns
Rising inflationary pressures in India
SBI Research also highlights the rising inflationary pressures in India, with imported inflation already at 5.4% and expected to rise further. The report warns that CPI inflation could indicate more than 4.5% inflation for the next 3 quarters. Given this volatile backdrop, RBI is expected to be cautious in its communication during this policy review meeting.
Economic challenges
External sector concerns
The SBI Research report also flags external sector concerns such as rupee depreciation and capital outflows. It notes that FY26 witnessed the "highest FII outflows at $16.6 billion since 1991," while the balance of payments (BoP) is expected to remain in deficit in FY27. These factors add to the economic uncertainty facing India amid global conflicts.
Policy measures
Focus on market functioning expected
SBI Research suggests that beyond rate action, the RBI may focus on liquidity and market functioning. The report says "What is currently required is focus on correcting market microstructure," and hints at the possibility of RBI exploring "Operation Twist" to manage yields. However, recent regulatory measures aimed at stabilizing the rupee could pose operational challenges for banks, particularly with regard to curbs on speculative positions in currency markets.