Wait & watch is prudent policy, RBI does well to hold rates
The April meeting of the RBI’s Monetary Policy Committee was held in a macroeconomic climate starkly different from the benign milieu of its February meeting. The conflict in West Asia has raised the spectre of stagflation, far removed from the Goldilocks environment of low inflation and steady growth. Even as a two-week ceasefire has now been agreed upon, the MPC has opted, rightly, to wait and watch. The repo rate remains unchanged at 5.25 per cent, and the neutral stance has been retained. The committee’s rationale was straightforward: “The economy is confronted with a supply shock. It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook,” it said.
Dislocations in the energy markets have led to price surges and strained supplies. Disruptions have, in fact, moved to other commodities, and a wide range of sectors have been affected with knock-on effects on jobs and incomes. While the situation remains uncertain, the RBI has forecast headline inflation at 4.6 per cent in 2026-27. Notwithstanding the ceasefire, the likelihood of global fuel prices staying elevated — prices at the pump in India have so far remained unchanged — coupled with the possibility of fertiliser shortfalls and El Niño conditions could complicate matters. On the other hand, the central bank has now projected the economy to grow at 6.9 per cent this year, down from an expected 7.6 per cent in 2025-26. There are considerable risks, as the committee notes that “further escalation and wider spread of the conflict, heightened volatility in global financial markets and weather-related events, however, weigh on the domestic growth outlook”. Monetary policy action down the line will depend on how growth and inflation evolve, and the extent of the deviation in their trajectory from the RBI’s assessment.’
Following the ceasefire, markets the world over soared. Nikkei 225 was up (5.39 per cent), as was Kospi (6.87 per cent), Sensex (3.95 per cent) and FTSE 100 (3.07 per cent). Brent crude oil fell, and is currently trading at around $92.3 per barrel. Much will depend on whether the ceasefire holds and how long it takes for the energy supply constraints to ease.
- 1The Reserve Bank of India's Monetary Policy Committee (MPC), constituted under Section 45ZB of the RBI Act, 1934, decided to maintain the repo rate at 5.25%. This demonstrates the MPC's core governance function of inflation targeting and maintaining price stability. The committee's "wait and watch" approach highlights its role in navigating economic uncertainty to balance inflation control with national growth objectives, a key aspect of economic governance.
- 2The conflict in West Asia directly influences India's domestic economic policy, as seen in the RBI's decision to hold interest rates due to supply shocks and volatile energy prices. This illustrates the interconnectedness of global geopolitics and national economic stability. Diplomatic efforts, such as the mentioned ceasefire, are crucial as their success or failure can significantly impact global markets, including India's Sensex and commodity prices.
- 3The spectre of stagflation, a combination of high inflation and low economic growth, poses a significant threat to social welfare. The RBI's forecast of 4.6% inflation, driven by global supply shocks in energy and potential fertiliser shortages, directly impacts household budgets. This economic pressure, coupled with a lowered growth projection to 6.9%, could strain jobs and incomes, affecting the wider population's economic security.
- 4The RBI's policy considerations extend beyond geopolitics to environmental factors like potential El Niño conditions. This climate pattern, characterized by unusual warming of the Pacific Ocean, can disrupt monsoon patterns in India, leading to poor agricultural output. This highlights how environmental science directly intersects with economic forecasting, potentially driving food inflation and complicating the MPC's inflation-targeting mandate, a crucial link for legal and policy analysis.