Perspectives on RBI MPC by Ms. Madhavi Arora, Chief Economist, Emkay Global Financial Services
Below the Perspectives on RBI MPC by Ms. Madhavi Arora, Chief Economist, Emkay Global Financial Services
RBI MPC policy: Quick view
* RBI held rates in April with a neutral stance and cautious tone, flagging ME oil risks, with fears of the supply side pressures turning into demand side ones, if the conflicts drags. It sees downside risks to FY27 growth (6.9%) and upside risks to inflation (4.6%)– marking an unbalanced outlook after a long time.
* We think financial stability will no longer play second fiddle to the inflation-centric policy reaction function, and may well emerge as the primary focus for the RBI, if the crisis persists.
Policy responses are needed to broaden beyond inflation, with a stronger emphasis on macro-financial stability and a more assertive stance on FX management, especially during periods of stress.
This shift is already visible: amid a sharp currency decline and limited conventional policy options, the RBI has already tightened FX trading norms, effectively raising the carry cost of long USD/INR positions to prohibitive levels.
* In any case, we believe the bar for any conventional rate hike remains high. It would require a sustained supply shock that drives headline CPI well above target on a persistent basis, with energy price pressures spilling over into core inflation and, importantly, into inflation expectations.
* On system liquidity management, the RBI maintained that they will remain proactive and pre-emptive. We will keep a watch on the this. Sustained and sizeable unsterilized spot FX intervention ahead (if needed) would directly drain domestic liquidity and push up money market rates. At the same time, further expanding the already heavy RBI’s net short forward position will also come at a cost. This will come to bite system liquidity with a lag, and pressure the spot INR with higher USD demand as contract maturity nears.
Measures for capital adequacy and market making: RBI has eased CRAR and Investment Fluctuation Reserve norms for banks to free up capital, and allowed NBFCs/HFCs into the term money market to improve funding access and overall liquidity.
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