RBI pencils moderate increase in retail inflation

Mumbai: Reserve Bank of India has kept the Repo rate unchanged post three-day brainstorming monetary policy committee which concluded here today.

Briefing the media, the RBI governor Sanjay Malhotra said, “Fundamentals of Indian Economy are on stronger footing than previous episodes.”

He further said that upside risks to inflation outlook due to increased energy prices, weather disruptions have increased.

On inflation, the RBI has pencilled moderate increases with Q1 at 4 per cent and 4.4 per cent for Q2. Indicating, that no sharp surge in headline CPI is priced in due to a transmission of higher energy prices. For the full year, headline CPI is projected at 4.6 per cent - figure which is comfortably in the RBI’s target range, however, look modest.

Talking to Bizz Buzz, Khushali Dutt of Equirus Securities, says, “We estimate CPI for FY27 at 4.6-4.8 per cent with 1H at 4.4 per cent vs RBI’s estimate of 4.2 per cent Notably, RBI estimates core CPI at 4.4 per cent for FY27 and even lower figure excluding precious metals – indicating that underlying inflation is more comfortable than headlines would suggest.”

Overall, the RBI refrained from sounding hawkish on the inflation front while emphasizing fiscal measures to tame price pressures. However, risks are on the upside with possible El Nino impact also an added variable going forward, she added.

On growth, estimates are measured with 6.9 per cent for FY27, Q1 at 6.8 per cent vs 6.9 per cent and Q2 at 6.7 per cent vs 7 per cent amidst the current Middle East crisis with risks to projections on the downside – largely in line with estimates of 6.5 per cent -6.8 per cent for FY27.

However, the governor continued to emphasize the robustness of domestic macros and risks stemming from external forces. On the FX front, the governor reiterated that the RBI doesn’t target any specific levels but intervenes against excessive volatility.

Inflation is within target, but the trajectory is rising. Growth is moderating but not collapsing. At the press conference the governor mentioned that despite the current shock, growth is expected to be robust due to fiscal measures to keep price pressure contained and robust domestic fundamentals.

Though a two-week ceasefire has been announced, there remains continuing uncertainty on the path and duration of the conflict, and its impact on the domestic economy.

At this point, we expect the RBI to keep the policy rate unchanged. The governor’s mention of “we can keep rates low in the near to medium term” at the press conference while emphasizing government measures to control price pressures, indicate that it’s not in a hurry to take a policy action. However, we do believe that if the conflict resumes leading to a sustained period of high energy prices, domestic inflation from higher energy (a retail fuel price hike), second order price effects, and currency pressure, would require the RBI to raise rates. Note that the current CPI and growth projections are based on average crude at $85/bbl.

With improved sentiment following the US-Iran ceasefire and recent RBI moves on arbitrage trades in NDF markets, INR carries an appreciation bias, and we see it moving in the 92-93 range in the near term.