RBI WALKS A FINE LINE ON RATES AND RUPEE

Asthe monetary policy committee of the Reserve Bank of India (RBI) meets for its decision on 8 April, geopolitics has moved from being a peripheral risk to being the centre of the macro landscape.

- UPASNA BHARDWAJ

The West Asia conflict has disrupted energy and logistics flows, with spillovers via oil, gas, fertilizers, freight, insurance and even remittances as traffic around the Strait of Hormuz remains constrained. In such unsettling times, the traditional baselines have become blurry, with RBI's predominant task shifting more towards safeguarding macro and financial stability as tail risks increase.Severe trade disruptions through the strait have triggered broad spillovers across energy and related commodities. Although the direct supply shock disproportionately hits heavy energy-importing Asian economies such as Korea, Japan, China, Thailand, Philippines and India, the larger concern is the second-order inflation impulse now threatening to disrupt global monetary policy trajectories.

Domestically, the Indian economy entered the crisis with resilient activity indicators and still-supportive demand. Further, the inflation environment too has remained benign. February retail and wholesale inflation was 3.2% and 2.1%, respectively.

However, persistent supply shocks are skewing the inflation distribution sharply higher, despite the government and oil marketing companies cushioning the impact for now. We expect the pass-through to consumers to begin in a month or two. Furthermore, inflation risks are increasing amid a weakening rupee, rising probability of subpar monsoons, and risks of fertilizer shortage. On the positive side, heavy buffer food stocks should help cap some of the monsoon-led risks to food inflation.