A lot has changed from the time the Monetary Policy Committee (MPC) met to announce the policy in February to now. At the time of the February policy, even though geopolitical risks were highlighted, no macro projections would have assumed a West Asia war and the consequent impact of the same on supply chains, commodity prices, and currency markets etc.
In February, underlying inflation was assessed to be low even as MPC members took into consideration volatility in energy prices, adverse weather events and unfavourable base effects from large decline in prices in the previous year. The first couple of quarters in FY27 was assessed to see inflation at around 4 percent. On the growth front, the MPC highlighted that the economic activity remains resilient despite a challenging external environment. The First Advance Estimate also suggested a continuing robust growth momentum, driven by domestic factors, including robust private consumption demand.
Since the last policy, geopolitical tensions have escalated dramatically with the US-Israel war continuing to rage, leading to a considerable change in the macro-economic assessment of the Indian economy. The “goldilocks” scenario of high growth and low inflation is likely to alter as growth is expected to move lower while there are risks for inflation to move higher.
On the growth front, India’s exports are likely to be adversely affected as tensions in West Asia have led to the closure of the Strait of Hormuz. The global slowdown will further weigh on external demand. Domestically, production lines can get impacted due to supply chain disruptions while high input costs may lead to manufacturers to pass them on to end users.
Recently, the government has opened the fiscal purse strings to absorb the pressures from the oil shock – reducing the excise duty on petrol and diesel, thereby keeping the pump-head prices of petrol and diesel in check. Likely, the government will also absorb the higher subsidy requirements of fertilizer and LPG within the fiscal, thereby protecting the economy from inflation. Having said, the inflation pressures will be felt due to currency depreciation – RBI calculates that a 5 percent depreciation leads to Headline CPI moving up by 30-35 bps.
The critical pressure is on the external sector dynamics. As per the RBI Bulletin published in March 2025, the share of Gulf countries in India’s remittances in FY24 was around around 38%, and this flow can weaken. The import bill is expected to rise due to higher oil prices, and the Current Account Deficit (CAD) is anticipated to widen to around 1.6-2 percent dependent on oil prices being in a range of US$75-85 a barrel. Capital outflows have been significant in FY26, even before the war broke out and with the war conditions, it is unlikely that capital inflows will come in. USD/INR had depreciated to close to 95 levels before RBI’s measures to kill speculation between the deliverable and the non-deliverable markets has pulled it back to around the 93 levels.
Given the above, the challenges of monetary policy making suddenly become a tight rope walk. The RBI would have to closely look at the inflation dynamics v/s the growth perceptions to take a calculated step. RBI is in an impossible trinity – where a country cannot simultaneously achieve a fixed exchange rate, free capital flow and an independent monetary policy. In this context, the credibility of the RBI could be towards maintaining an independent monetary policy.
Thus, there is no further scope for policy easing, especially as the globe has started to report inflation challenges emerging out of elevated energy prices. The synchronous easing of monetary policy of 2025 in most likelihood has been replaced by tentative talks of tightening. Even as India would not follow global policy to determine domestic monetary policy, this becomes important as global yields get pushed higher and foreign flows into India can falter.
The April policy is likely to be a status quo policy, and the stance is also expected to stay unchanged. Fortunately, India has strong growth, and a low inflation mix now, there is some room for flexibility and ease of time for the RBI. Critical in this policy is how the RBI communicates on the evolving risk scenarios, which could provide some clues to the markets about RBI actions in the period ahead. Important would also be the RBI’s new projections on growth and inflation, which can also provide some cues to the risks ahead with respect to the growth-inflation mix and hence on how monetary policy would conduct itself.
The critical question also facing the RBI: should it look through a supply side inflation? Possibly yes for now. However, the RBI may have to react by tightening its monetary policy if inflation expectations show an upside risk. The final word: the repo rate has floored and if inflation along with inflation expectations surprise on the higher side, the RBI would be more favourable towards tightening, even at the risk of surrendering growth. Our view is that FY27 could see the repo rate hiked by 25-50 bps if the West Asia crisis continues and oil remains on the boil.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.