The Monetary Policy Committee of the Reserve Bank of India will meet for three days, starting today, to decide on interest rates. The RBI is expected to keep the repo rate unchanged at 5.25%. These developments have occurred against the backdrop of a very difficult period in the country, which has been facing many troubles, both externally and internally, due to rising crude oil prices and the depreciation of the Indian rupee, among others.
Inflation is the key problem the RBI faces now because international crude oil prices have crossed $100 per barrel, potentially leading to higher fuel and transport prices in India. It is estimated that for every $10 increase in oil prices, inflation rises by 0.60%. And the rupee has depreciated against the US dollar.
Despite being close to its 4% target for quite some time, inflation could suddenly increase due to the risks posed by the super El Niño. Economists at prominent banks such as HDFC, ICRA, and SBI believe the RBI will maintain its neutral policy. This implies that it is keeping itself open to adjusting the interest rate as the situation unfolds.
Whereas the RBI has always reduced interest rates to boost the economy, it has, since the end of last year, paused and focused on stabilising prices. When it announces its decision on Wednesday next week, the 8th of April, all eyes will be glued to the RBI’s new growth and inflation projections. In the meantime, the bottom line remains clear: with so many uncertainties worldwide, it is best to remain vigilant. The goal is no longer growth but inflation control.
