Clipped from: https://www.thehindubusinessline.com/opinion/mpc-positive-despite-strong-headwinds/article70839555.ece
MPC’s assessment of the risks being faced by the Indian economy is comprehensive and balanced
The chances of actual GDP growth turning out to be lower than 6.9 per cent are not insignificant | Photo Credit: –
It is only a coincidence that a two-week ceasefire of the on-going US-Iran war was announced barely a few hours before the Monetary Policy Committee (MPC) of the RBI met briefly in the morning of April 8, and concluded its three-day bi-monthly meeting — the first one for FY 2026-27.
The policy announcement was made shortly thereafter at 10 AM. Keeping the rate unchanged at 5.25 per cent and maintaining the ‘neutral’ stance were widely anticipated. However, the contents of the policy and its tone and tenor likely reassured the financial market, as it bounced back from the multiple-week lows on the ceasefire news.
Post the policy, the rising trend of equity and G-Sec prices, observed since the opening, continued: The Sensex was up by 2860 points and the yield on 10-year G-Sec was lower by 10 basis points vis-à-vis the previous day’s close.
By and large, the MPC’s analysis and assessment of the risks being faced by the Indian economy in the face of the strong headwinds emanating from the war, especially due to the blockade of the Strait of Hormuz, are comprehensive, realistic and balanced. As a matter of fact, the policy announcement has been the first opportunity for making available an ‘official’ document in this regard.
Growth, inflation outlook
In the wake of the outbreak of the US-Iran war in early March, India’s growth prospect for 2026-27 was seen as lower vis-à-vis 2025-26 and earlier projections made in this regard, based on their assessment of India’s economic exposure to the conflict. For example, last month, the OECD projected India’s GDP growth to moderate to 6.1 per cent in the current fiscal from 7.6 per cent recorded in 2025-26.
Moody’s Ratings recently cut India’s GDP growth estimate for the current fiscal to 6 per cent from 6.8 per cent made earlier. Domestic rating agency ICRA expects the GDP growth to be lower at 6.5 per cent, owing to the adverse impact of elevated energy prices and concerns around energy availability amid the conflict.
The MPC has slashed the real GDP growth projection for 2026-27 to 6.9 per cent, under the assumption that the adverse impact of the conflict would remain contained in the near term. The risks are on the downside. However, the chances of actual GDP growth turning out to be lower than 6.9 per cent are not insignificant.
Even if the ceasefire lasts indefinitely, disruptions in the supply chain for crude oil, LPG, and fertilizers, arising out of destruction of energy infrastructure in West Asia, on the one hand, and subdued private consumption, softer industrial activity and a weakening in the momentum of gross fixed capital formation are likely to weigh on the headline growth.
If the ceasefire is not extended further and the conflict resumes, then there is possibility of even recession in the conflict zone and in many OECD countries, which would severely impair India’s macro performance through several channels.
In RBI’s words ‘… the initial supply shock can potentially transform into a demand shock over the medium term if the restoration of supply chains is delayed.’
CPI inflation for 2026-27 has been projected by the MPC to be at 4.6 per cent. In its view, persistently elevated energy prices due to the conflict and possible El Nino conditions pose upside risks to inflation. Core inflation has been projected lower at 4.4 per cent for 2026-27, which is a cause for some comfort. Also, commencement of projection of core inflation is a welcome move.
The current easing cycle that began in February last year, involving a cumulative rate cut by 125 basis points, the last one being a cut by 25 basis point in December 2025 has come to an end, by all indications. Assuming an end to the US-Iran war in the foreseeable future, policy rates are likely to go up in the fourth quarter of 2026-27 or in the first quarter of 2027-28.
Regulatory initiatives
The proposed move to revise and rationalise the matters requiring the attention of the boards of banks should be welcomed by all concerned. It has been long overdue. The boards of banks are overburdened with routine and trivial matters, leaving them with very little time and incentive for major policy issues, strategy formulation and risk management. In parallel, it would be necessary to ensure that the boards have at least a minimum number of professionals with demonstrated skills and expertise in the areas of banking, finance, management, HR and technology. The situation in this regard has been far from satisfactory in many banks for a long time indeed.
The rationale for dispensing with the requirement of Investment Fluctuation Reserve (IFR), which was introduced in September, 2023 is not very clear. In any case, balances under IFR are eligible for inclusion in Tier II capital without any cap. In fact, banks need a buffer like IFR to provide a cushion against sharp fall in the price of fixed income securities held in ‘Available for Sale’ and ‘Fair Value through Profit and Loss’ categories in situations such as the current one which has witnessed a significant hardening of yields. To be sure, the extant guidelines permit banks to draw down the balances held in IFR, subject to fulfilment of certain conditions.
A few weeks back, the Government, in consultation with RBI, issued a notification to retain the inflation target at 4 per cent, with a tolerance band of +/-2 per cent, for further period of five years, beginning April 1. This inflation targeting framework has served the Indian economy and its financial sector quite well, in terms of growth and stability.
Nonetheless, there is a need to assess in what ways this framework could be put to use for bolstering the country’s strategic resilience against external shocks/disruptions such as those caused by the current US-Iran war. One possible strategy would be to avoid any significant and sustained overvaluation of the rupee in real terms. For this purpose, CPI inflation in India should not deviate much from those of its major trading partners, especially those with which it has/going to have a free trade agreement.
The writer is a former central banker and a consultant to the IMF. Through The Billion Press
Published on April 9, 2026
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