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Below the Perspective on RBI MPC Announcement by Ms. Rajani Sinha, Chief Economist, CareEdge 

In line with our expectations, the RBI’s MPC kept the policy rate and stance unchanged, adopting a data-dependent approach amid an increasingly uncertain global environment. The decision reflects the RBI’s wait-and-watch approach to assess the evolving impact of external developments and their implications for domestic growth and inflation before going for interest rate adjustments. Amid elevated energy prices, risk of below-normal monsoon and persistent supply-side bottlenecks, the RBI has revised its FY27 GDP growth forecast downward to 6.6% from 6.9% earlier, with a more pronounced moderation expected in the second half of the fiscal year. On the inflation front, the RBI has projected CPI inflation to average at 5.1% for FY27, up from the earlier forecast of 4.6%, citing twin risks arising from expected below-normal monsoon amid El Niño conditions and elevated energy prices. Furthermore, it also emphasised on the risks stemming from the second round effects of higher WPI inflation. With this revision, RBI’s growth and inflation projections for FY27 broadly align with our estimates.

Another key highlight of the MPC policy was the announcement of measures aimed at attracting foreign capital inflows, such as expanding the universe of securities eligible under the Fully Accessible Route for foreign investors, providing concessional forex swap facilities for PSUs raising ECBs, and absorbing hedging costs on FCNR(B) deposits. These measures should support forex inflows and the balance of payments position. Additionally, the government has also removed taxes on capital gains and interests for foreign investors in government securities. While the current account deficit is expected to widen to 2.1% of GDP in FY27, it is relatively better compared with levels witnessed during previous episodes of stress, such as the taper-tantrum episode, where it averaged 3.6% of GDP. The weakness in the rupee in the current context largely stems from the sustained foreign investment outflows. We expect foreign investment inflows at 0.5-0.6% of GDP in FY27, much lower than the average of 2% of GDP seen during the taper tantrum episode. The measures announced today by both the RBI and the government should ease pressure on the rupee. If the conflict de-escalates in the near term and global crude oil prices average around USD 90/bbl in FY27, we expect the rupee to average in the range of 92–93 against the US dollar. However, if Brent Crude prices average closer to USD 100/bbl, the rupee could remain near the 94 per US dollar level.

Looking ahead, the situation remains fragile amid the ongoing West Asia conflict, with intermittent flare-ups continuing to highlight persistent geopolitical risks. Against this backdrop, the MPC’s decision to adopt a wait-and-watch approach appears prudent, given the simultaneous pressures on both growth and inflation in an increasingly stagflationary environment. It is important to note that much of the inflation risks stems from supply side shocks rather than overheating domestic demand. The future trajectory of policy rates will largely depend on the MPC’s assessment of evolving growth-inflation dynamics, which remain significantly influenced by external factors. If the external environment stabilises quickly, the MPC may choose to look through the near-term spike in inflation, particularly as projected growth in FY27 remains below the potential rate of around 7%. However, if the conflict persists longer and inflationary pressures become entrenched in household expectations, the possibility of rate hikes toward the latter part of the year cannot be ruled out.

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