RATE DECISION DILEMMA FOR THE RBI

RATE DECISION DILEMMA FOR THE RBI

The upcoming RBI MPC meet from 06-Apr to 08-Apr will culminate in the policy statement. At a broad level, there is a key decision dilemma for the RBI. The war in the Middle East has led to a spike in the price of oil and natural gas. Higher fertilizer prices would likely seep into food inflation. Also, with shipping routes disrupted, the supply chain constraints will translate into higher core inflation. Brokers like Goldman Sachs are already pegging Indian inflation for FY27 at closer to 4.8%, sharply higher than FY26. There is a case for rate hike.

That is just one side of the story. On the other hand, the war has also created growth concerns for India. GDP growth for FY27 has already been lowered to around 6.0%, based on how long the war would continue. The rationing of gas has led to many industries shutting down or cutting production. Amid higher inflation, consumer demand is likely to be tepid. Also, corporates are will be sceptical about committing capex in a year when supply chain constraints are high. This is a fit case for the RBI to cut rates to boost growth.

RECAP OF KEY ANNOUNCEMENTS OF FEB-26 MONETARY POLICY

Here are key highlights of the February 2026 policy statement.

RBI MPC held the repo rate at 5.25% in the February meeting; and also kept the stance of the monetary policy at Neutral.

The FY26 GDP growth estimate was hiked by 10 bps to 7.4%; more in order to align it with the GDP growth estimates put out by MOSPI.

The February 2026 policy also raised the inflation forecast for FY26 by 10 bps to 2.1%, largely to reflect the slightly higher weight of core inflation in the new series.

Let us turn to the specific expectations from April 2026 monetary policy.

WILL RBI CUT RATES, HOLD RATES, OR HIKE RATES IN APRIL?

Technically, all the three outcomes are possible. RBI has a case to cut rates to boost economic growth. It also has a strong case to hike rates to contain inflation arising from the supply chain constraints created by the US-Iran war. However, it is very likely that the RBI may choose to maintain status quo on rates. Cutting rates may be adventurous as the full impact of inflation is not yet known, since oil prices are still regulated.

A rate hike may or may not curb inflation as this looks more like supply-push inflation rather than demand-pull inflation. In the former case, rate cuts work in the medium term, but not in the short term. The most likely scenario is that the RBI may hold repo rates at 5.25% and observe the second level impact on inflation and growth. Once the trajectory of the war is clearer, it would give the RBI a better platform for monetary manoeuvre.

WILL RBI CHANGE ITS STANCE TO “ACCOMMODATIVE” IN APR-26?

If the RBI maintains status quo on rates, the best choice would be to keep the stance unchanged at “Accommodative.” Any change in the stance will be seen as a signal of future rate movements, something the RBI would want to avoid. For now, the RBI stance is that monetary actions would be entirely data-driven and no guidance would be given.

What would be more interesting to see is the votes in favour of change in stance. Till now, there has only been 1 dissent vote for change of stance. If that clamour builds up, then the MPC would be under pressure. However, for now, the RBI would not want to commit itself to any monetary stand; either through rate action or through stance shifts.

WILL RBI CHANGE ITS FY27 GDP AND INFLATION ESTIMATES?

It is clear that the war has triggered downside risks to GDP growth and upside risks to consumer inflation. For instance, the average inflation being projected is around 4.8% for FY27 and GDP growth is at 6.0%. That means; base estimates for GDP will be lower and inflation will be higher than last year. However, if you look at February inflation; out of the 3.2% inflation, nearly 5.4% came as imported inflation, and the domestic inflation was just 2.0%. The RBI may provide a base case for GDP and Inflation estimates for FY27, but greater calibration would be available only in the June meeting. Remember, there are also fears of a super El-Nino this year, which is bad news for food inflation. Wait and Watch!

HOW WILL RBI MANAGE THE LIQUIDITY IN THE SYSTEM?

Between Jan-26 and Feb-26, the system liquidity has come down from ₹2.6 trillion to ₹1.7 trillion. The RBI will focus on ensuring that the Rupee gets sufficient liquidity support. However, there is a bigger yield challenge for the RBI. The surplus liquidity has led to sobering of short-term yields, while inflation expectations has spiked longer term 10-year yields to 7.13%. The RBI is likely to undertake aggressive measures to push up yields at the short end of the yield curve and bring down yields at the long end of the yield curve. At least, the bond yields must be aligned with the movement in the repo rates. Currently, longer term yields have substantially diverged from the repo rates.

BIG STORY WILL BE ON THE FOREX FRONT THIS TIME?

The real focus of this policy will be on managing the fall in the rupee. The RBI recently announced 3 key measures. It restricted NOP of banks to $100 million EOD. Secondly, it cut speculation in the NDF market by scrapping NDF forward contracts for resident Indians and NRIs. Thirdly, companies cannot rebook forward contracts that they have cancelled. These 3 measures helped the rupee to spike from ₹95.22/$ to ₹92.67/$.

Much of the rupee related announcements will not be in the text of the policy but in the regulatory announcements outside the policy. One can expect sharper curbs on short-rupee speculation. That has helped the rupee. Also, the RBI could announce an attractive scheme for NRI Deposits, that can result in a surge in forex inflows. That will not only help the rupee harden, but also make the current account look more palatable.

The 3-day MPC commencing on 06-Apr will have an intense debate on addressing the West Asia situation on a war-footing. The debate will be less about rates or forecasts, and more about immediate action points. That will be evident in the MPC statement on 08-Apr.