Kamal Ghorui
MUMBAI: Hours after the US announced a pause in hostilities in West Asia, triggering a global rally in financial markets, the Monetary Policy Committee of Reserve Bank of India unanimously decided to keep the policy rate unchanged at 5.25% for the second consecutive meeting, with governor Sanjay Malhotra expressing cautious optimism about keeping rates lower for longer.The governor outlined multiple areas of concern. Elevated crude oil prices could increase imported inflation and widen the current account deficit. Disruptions in energy markets, fertilisers and other commodities may adversely impact industry, agriculture and services, reducing domestic output. Heightened uncertainty, increased risk aversion and safe-haven demand could affect domestic liquidity conditions, economic activity, consumption and investment, he added. External demand may weaken and remittances may slow. Financial spillovers could tighten conditions and raise borrowing costs.The optimism was reflected in the oil price assumption, which RBI expects to average $85 per barrel this year, indicating expectations of early normalisation or a sharp drop ahead. The governor also reassured markets that the forex measures limiting banks’ open positions and barring client exposure to offshore markets were not structural and were aimed only at preventing “excessive speculation” from becoming self-fulfilling. “We remain committed to deepening and internationalising the market. These measures are temporary and will be reviewed as conditions stabilise,” said Malhotra.Another sign that the policy stance is dovish was RBI’s decision to ease capital norms and reserve requirements for banks. Measures such as the removal of the Investment Fluctuation Reserve requirement and easing of Capital to Risk-Weighted Assets Ratio computation norms will strengthen banks’ capital positions and help support credit growth on a sustained basis, said SBI chairman CS Setty, who is also the chairman of the Indian Banks Association.RBI has forecast GDP growth at 6.9% for the year, with a quarterly profile of 6.8% (6.9% earlier) in Q1, 6.7% in Q2 (7% earlier), 7% in Q3 and 7.2% in Q4. Inflation, by contrast, is expected to run higher, with CPI at 4.6% for the year, broken down into 4% in Q1, 4.4% (4.2% earlier) in Q2, 5.2% in Q3 and 4.7% in Q4.According to Madan Sabnavis, chief economist, Bank of Baroda, these projections virtually indicate few chances of any further rate cuts, as RBI has flagged El Nino as a risk to inflation too. “The view on economic prospects is balanced and indicates resilience to a large extent. The RBI has reiterated that it has no view on the value of the rupee, which should convince markets,” he added.Globally, RBI has painted a cautious picture. Trade is set to slow in 2026 relative to 2025, dragged down by tariff-related uncertainties, the West Asia conflict and elevated energy prices. India is already seeing the effects: merchandise exports have contracted while imports have surged, widening the trade deficit. Services exports and remittances may cushion the blow, keeping the current account deficit “moderate”, but rising energy prices and global uncertainty pose upside risks. Even so, India appears sturdier than in past crises, and stronger than some peers, Malhotra said.
