Perspective on RBI MPC Data by Ms. Madhavi Arora, Chief Economist, Emkay Global Financial Services
Below the Perspective on RBI MPC Data by Ms. Madhavi Arora, Chief Economist, Emkay Global Financial Services
RBI MPC: Keeping the guards ready
* RBI’s unanimous 25bps rate cut and stance change to “accommodative” reflect the uncertain global environment and benign inflation environment; the change in stance provides a directional easing bias going forward.
Given global volatility and uncertainty, the MPC chose not to frontload all its actions and thus kept its powder dry for rainier days.
The fluid global dynamics will require RBI to be nimble in managing any risk of tighter financial conditions, especially as the shock to sentiment/capital flows will likely require higher risk premia from EMs.
The RBI may want to keep ammunitions ready, given fluid global markets, apart from conventional easing.
Options like (i) non-conventional easing in the form of easier regulatory (lending) norms, (ii) lower daily CRR maintainance requirement for banks to sub 90%, (ii) sterilised INR management, etc. may be used, if needed.
* One does not know the extent to which this global trade war could stretch. Monetary policy may have to do the heavy lifting in India by being more counter-cyclical than fiscal this year.
While June 25bps cut is a given, we no longer rule out another 25-50bp cut from there, which could take the terminal rate to 5.25% in this cycle – of course contingent on the extent of the global slowdown/recession
* While the 20bp growth downgrade by the RBI to 6.5% for FY26 reflects the uncertain global environment, we think there would be material downward risk to their growth forecast – to the tune of ~50-70bps. This would emanate from a much higher risk of a US/global recession if these global tariffs are maintained, while domestic private economic agents stay largely absent.
* We reckon with the RBI that FY26 inflation would have a net disinflationary impulse (CPI revised down 20bps to 4%) which could emanate from lower global commodity prices/supply glut of goods.
China’s survival response to massive tariff blow will matter for India, amid its excess industrial capacity and dumping in the world/Asia and use of FX as a policy tool.
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