Crisil Economy First Cut: Keeping powder dry amid volatility

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept policy rates unchanged at its April meeting and maintained its neutral stance, giving it flexibility on future monetary policy actions. Amid uncertainty triggered by the the West Asia conflict, the MPC chose to wait and watch how growth-inflation risks evolve, while noting the risks are significant. It reiterated its commitment to maintain adequate domestic liquidity amid volatility in the financial market.

The MPC maintaining status quo was in line with our expectations. With the duration of the West Asia conflict unclear, it is prudent to wait and watch how this supply shock affects the growth-inflation mix.

We believe the downside risk to growth is a greater concern than the upside risk to inflation in this crisis, given producers are bearing the brunt of energy and other input shortages. Meanwhile, the government is prioritising consumers in energy supply and is so far limiting the passthrough of oil and gas price hikes to consumers.

We expect headline inflation to rise to 4.5% this fiscal, remaining within the MPC’s target range. However, the conflict prolonging beyond April will increase upside risks to inflation.

Financial markets have responded more to global market volatility relative to real sector indicators so far. RBI will need to be nimble to ensure adequate liquidity and stem excessive rupee volatility.