Economists expect the Reserve Bank of India (RBI) to keep policy rates unchanged in April as geopolitical tensions, volatile commodity prices and evolving domestic macroeconomic indicators cloud the outlook for monetary policy. In its February policy review, the RBI kept the repo rate unchanged at 5.25% and maintained its neutral stance.
“I believe the rate cut cycle is over, and the RBI definitely will maintain a status quo,” said Madan Sabnavis, chief economist at Bank of Baroda.
Agreed Gaura Sengupta, chief economist at IDFC First Bank, “The ongoing Middle East conflict is essentially a supply-side issue rather than a demand-driven concern. With the RBI ensuring adequate system liquidity, we do not anticipate any change in rates or policy stance in the forthcoming review.”
Navigating Global Headwinds
While rising oil prices could push up inflation, tightening policy in response could also risk slowing growth, leaving central bankers with limited room for aggressive rate actions.
Global oil benchmarks fluctuated sharply this week – first rising to almost $120 per barrel before crashing to $81 on Tuesday. On Wednesday it was hovering around $88-89 per barrel. The pullback was driven by indications from the US administration that the conflict in Iran might end soon, and that efforts are underway to step up oil supplies through waiver of selected sanctions, plans to dip into emergency stockpiles, provide insurance and navy support for vessels through the Strait of Hormuz, among others.
Sakshi Gupta, chief economist at HDFC Bank, added that if the conflict is resolved in the coming weeks, the impact on India’s growth and inflation trajectory would likely remain limited and would not warrant any immediate monetary policy action.
“Medium-term monetary policy response would be contingent on whether the conflict prolongs and leads to any sustained inflationary risks in the economy,” she added.
In a report by DBS Bank, senior economist Radhika Rao said that the RBI is likely to undertake targeted measures to ease market tensions, if needed. “Outside of the geopolitical tensions, we continue to expect the rupee to underperform the regional pack, even as the broader dollar might stabilise,” Rao added.
Proactive Liquidity Management
The currency had depreciated to a fresh low against the dollar, at 92.33 on Monday. To cap yields, the RBI conducted debt purchases via open market operations (OMO) worth Rs 50,000 crore on March 9 to stabilise the bond markets and has scheduled another Rs 50,000 crore on Friday, ahead of heavy seasonal advance tax as well as GST related outflows due in the coming weeks. This infusion would ease the drain from strong FX intervention and maturing FX forwards, the report said.