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

Mumbai: The Reserve Bank of India (RBI) is expected to maintain interest rates and keep its policy stance unchanged while announcing monetary policy on Wednesday, as policymakers grapple with the sharply changing global environment amid the US-Israeli conflict with Iran that has pushed up energy prices and raised fresh concerns about fiscal deficit, according to 15 organizations surveyed by ET.

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

Assessing the Impact of War
While the policy pause is widely expected, economists said the RBI’s communication, especially on the rupee and bond yields, will be closely scrutinized. Some participants also expect the central bank to take additional steps to support the currency in the face of sustained capital outflows.

“The RBI and the Indian government may be likely to make further policy changes to manage INR weakness,” said Michael Wan, senior foreign exchange analyst at MUFG Bank.

“These may include restrictions on gold and non-essential imports and higher import duties, and a special facility or foreign exchange clearing window by the RBI so that oil marketing companies can tap dollars instead of going to the market.”
Most economists expect the central bank to refrain from an aggressive response for now, preferring to assess the impact of war and high oil prices on the economy. “After two back-to-back circulars on the rupee, people are being reminded of the 2013 playbook, but I think that’s where the story ends,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, referring to the RBI’s moves to rein in the decline of the Indian currency.

“The year is not 2013 and there is no escape in foreign currency.” Sakshi Gupta, chief economist at HDFC Bank, said highlighting risks without sticking to a policy course is a good template to follow.

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

Gaurav Kapur, chief economist at IndusInd Bank, expects the President to likely acknowledge rising risks to inflation, growth and exchange rate, while also underlining macroeconomic and financial stability underpinned by adequate external buffers to absorb supply shocks.

Markets will focus on the assumed crude oil price, which supports the RBI’s growth and inflation forecasts. Retail inflation in India stood at 3.21% in February.

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