RBI may keep rates unchanged, focus on rupee stability and bond yields

Mumbai: The Reserve Bank of India (RBI) is expected to hold interest rates and keep its policy stance unchanged when the monetary policy is announced on Wednesday, according to 15 institutions surveyed by ET, as policymakers grapple with a sharply altered global backdrop amid the US-Israel conflict with Iran that has pushed up energy prices and raised fresh concerns over the fiscal deficit.

The six-member monetary policy committee meets April 6-8 for the first time since the war broke out on February 28.

Assessment of War’s Impact
While a policy pause is widely anticipated, economists said the RBI’s communication, particularly on the rupee and bond yields, will be closely scrutinised. Several respondents also expect the central bank to consider additional steps to shore up the currency amid persistent capital outflows.

“Further policy changes by the RBI and the India government to manage INR weakness could be likely,” said Michael Wan, senior currency analyst at MUFG Bank.

“These could include restrictions and higher import duties on gold and non-essential imports and a dedicated facility or FX swap window by the RBI so that oil marketing companies can tap dollars instead of going to the market.”

Most economists expect the central bank will avoid an aggressive response for now, preferring to assess the impact of the war and higher oil prices on the economy.“After two back-to-back circulars on the rupee, people are reminded of the 2013 playbook, but I think the story ends there,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, referring to moves by the RBI to rein in the Indian currency’s decline.

“It’s not 2013 and we don’t have a situation of a run on the currency.” Highlighting risks without committing to a policy trajectory is a good template to follow, said Sakshi Gupta, principal economist at HDFC Bank.

“If there is a hawkish commentary, it is likely to be balanced by stating that inflation is expected to remain within the comfort zone,” she said.

Gaurav Kapur, chief economist at IndusInd Bank, expects that the governor is likely to acknowledge rising risks to inflation, growth and the exchange rate, while highlighting macroeconomic and financial stability backed by adequate external buffers to absorb supply shocks.

Markets will focus on the RBI’s assumed crude oil price, which underpins its growth and inflation projections. India’s retail inflation stood at 3.21% in February.

In the last policy announcement on February 6, the RBI projected inflation for the first two quarters of FY27 at 4% and 4.2%, while GDP growth was seen at 6.9% and 7%, respectively.