POLICY RUN-UP – STATUS QUO WAS EXPECTED

POLICY RUN-UP – STATUS QUO WAS EXPECTED

In our monetary policy expectations note, we had underlined that the RBI had a case for all 3 outcomes. A rate cut could be justified on growth grounds. A rate hike could be justified on inflation. However, we had also indicated that status quo was the most likely outcome as the RBI MPC would await more data points. On 08-April, the RBI maintained status quo on rates. However, FY27 inflation estimate was hiked and GDP growth estimates were cut.

Between the February and April monetary policies, the big difference was the Middle East. With the war completing 39 days and standing on an uneasy truce; it is not clear how long the war would last. It is also not clear how long the lag effects of the blockade of the Straits of Hormuz will last. India has been hit in terms of oil and gas flows, but the trickle-down impact on other industries is visible. In this backdrop, the April policy was presented.

KEY HIGHLIGHTS OF THE APRIL 2026 MONETARY POLICY

Here are some of the key takeaways from the April 2026 policy statement.

RBI held repo rates at 5.25%. All 6 members of the MPC voted unanimously to hold the rates at the current level. The monetary stance was also held at “Neutral.”

This holds the SDF (reverse repo) at 5.00%, while the bank rate and marginal standing facility (MSF) also stay at 5.50%. Both are repo-linked rates.

The GDP growth estimate for FY27 has been cut by 50 basis points from 7.4% to 6.9% due to the downstream impact of the Middle East conflict.

Inflation forecast for FY27 was raised by 40 bps from 4.2% to 4.6%. This is to account for the spike in crude oil prices; and its impact on intermediate products.

With System liquidity averaging ₹2,30,000 crore, it is within the RBI comfort level of 1% of NDTL. However, the RBI will continue liquidity infusion measures.

Let us turn to the inflation and growth forecasts for FY27.

MPC RAISES FY27 INFLATION ESTIMATE BY 40 BPS TO 4.6%

The Indian economy closed FY26 with annualized inflation of 2.1%. In comparison the first estimate of FY27 inflation is 250 bps higher. This is partially due to the new series, but substantially due to the impact of higher oil and gas prices. In fact, the inflation impact in February and March has been largely imported inflation. While the market prices of petrol and diesel are still administered, the price of oil and gas seep into industrial and consumer costs. Clearly, average inflation in FY27 is likely to stay elevated.

The latest SKYMET forecast pegged this year’s monsoons at 94% of long period average (LPA), which classifies as a deficit year. The El Nino effect is expected to play out this year, which normally means warmer summers and delayed monsoons. That hit on Kharif output is expected to spike food inflation. For the first time, the RBI has also projected core inflation at 4.4% for FY27, an outcome of supply chain constraints. The 4.6% inflation for FY27 will have a quarterly distribution as under: Q1FY27 (4.0%), Q2FY27 (4.4%), Q3FY27 (5.2%), and Q4FY27 (4.7%). The FY27 Inflation push will be a mix of food, fuel, and core inflation.

RBI MPC CUTS FY27 REAL GDP GROWTH BY 50 BPS TO 6.9%

For FY27, the real GDP growth has been cut by 50 basis points to 6.9%. The disruption of the Strait of Hormuz is expected to impact growth. While industrial output is already being hit by availability of gas, there is also the demand impact that should be seen soon. While rural demand is expected to be robust, the impact on urban demand may be sharper. Also, the disruptions have hit export growth and that is likely to weight on overall GDP growth.

Another interesting factor at play is inflation. Real GDP growth was robust in FY26 despite modest nominal GDP growth. That was due to low inflation-driven GDP deflator. With inflation almost 250 bps higher in FY27, that comfort will not be there. For FY27, the 6.9% GDP growth has been broken up quarter-wise as under: Q1FY27 (6.8%), Q2FY27 (6.7%), Q3FY27 (7.0%), and Q4FY27 (7.2%). A recovery is expected in second half of FY27.

WHAT RBI MPC SAID ON EXTERNAL ACCOUNT AND LIQUIDITY?

January and February 2026 saw exports contracting -0.2% and imports growing 22.2%; due to gold imports. If this disruption continues for longer, the trade and current account could see deficit widening. FDI and FPI flows have been tepid. On the Exchange Rate policy, the RBI will continue to manage at the periphery, when rates move out of a fundamental range.

Average daily system liquidity is comfortable at ₹2,30,000 crore. However, rates at the short end are too high, despite comfortable liquidity. That is due to higher demand for debt paper at the short end due to uncertainty at the long end. RBI has hinted that it will ensure adequate liquidity, but also hinted at Operation Twist to correct yield-spread anomalies.

DEVELOPMENT AND REGULATORY POLICIES OUTSIDE RBI STATEMENT

Outside the ambit of the policy statement, RBI also announced certain development and regulatory policies. Here is a gist.

East of Doing Business: RBI will review and rationalize matters that require attention of bank boards, to utilize board time more effectively. Apart from consolidating regulatory instructions, RBI has also consolidated supervisory instructions. Thirdly, no due diligence will be required for onboarding MSMEs on TReDS Platform.

Support to Capital Adequacy: Now, quarterly profits can be included in CRAR computation, without NPA provisioning; giving more leeway to banks. Secondly, RBI is doing away with the need for banks to maintain an Investment Fluctuation Reserve (IFR) as additional buffer, due to more matured prudential norms.

Money Market Boost: To develop the Term-Money market, RBI will allow certain non-bank entities into this market; apart from banks and Standalone Primary Dealers (SPD). The borrowing limits of the SPDs is also being increased.

To sum up; April 2026 policy comes at a crucial juncture when the world is at war and supply chains are disrupted. We can expect more concrete measures in the June policy, when there is greater clarity on war outcomes and the impact of El Nino on monsoons. The minutes of this RBI policy will be published on April 22, 2026. More concrete measures and a sense of direction can be expected in the 03-05 June 2026 policy statement!