The Monetary Policy Committee (MPC) due to meet on April 6-8 faces many economic challenges arising from endogenous and exogenous factors relating mainly to regulatory and governance matters and the humungous uncertainty created by oil price spikes, scarcities of fertillizers and a number of other commodities and minerals. Under the circumstances, decision making has to be based on a large number of considerations that go beyond inflation and growth data.
The first requirement for MPC decision making is its access to sufficiently sound quality information especially for the months of February and March. Will the MPC be guided by information only about economic variables as reported by official sources and private data providers? What is the view that the MPC will take regarding the longevity of the war in the Middle East and the current geopolitical tensions. What if the conflict drags on and becomes more widespread involving many more nations?
Whether one likes it or not, the inflation targeting framework as provided for under the provision 45Z of the Reserve Bank of India (RBI) Act will just not be good enough, surely not in this situation. ‘Superior” politico-economic information that the authorities possess complementing the multiple economic and financial indicators and external environment will have to be the basis for decision making.
Indian economic policy thinking has so far been woven around a magical formula which has four elements: growth rate of about 8 per cent, inflation rate of less than 4 per cent, fiscal deficit of around 3 per cent of the GDP, and an external current account deficit of 1.5-2 per cent. MPC members would often like to strategise monetary policy thinking to enable the fructification of the magical formula.
Inflation dynamics
Given this background, the MPC would still be most concerned about the inflation dynamics that arises immediately from the shortage of crude oil and natural gas and their price hikes. Inflation spreading across the economy would raise production costs, weaken investment prospects, prompt high depreciation of the Indian rupee vis-à-vis the US dollar and challenge the fiscal space to absorb the increase in social welfare and infrastructure expenditures. If the inflation rate is not within the MPC’s comfort zone, say of >4 per cent but <6 per cent, then how much would the growth rate be in 2026-27? No one can make an estimate now but it will be a surprise if it is around 6 per cent, not 7 per cent and over as many economic analysts, including the Economic Survey, have projected.
MPC will have to resist the temptation of raising the policy rate of interest to combat the anticipated inflation, as the strict inflation targeting approach would suggest. What is more important is to look at the regulatory reform that would enable financial institutions (mainly banks and NBFCs) to continue providing credit on a more extended scale so that the borrowers can have a larger buffer of commodities and services including the use of artificial intelligence (AI), if need be, to address a possible longer haul of uncertainty. Inventory build up could well be for six months rather than the conventional three months. And the use of AI would need to be focused mainly for finding ways of reducing costs and making goods competitive both domestically and abroad. This would facilitate India’s exports to more diverse destinations.
This is not to suggest that India should not follow a multiple strategy of raising the policy rate by say, 25-30 basis points and revisiting the internal liquidity requirements model once again along with undertaking regulatory reform with an exceptional (exceptional because liquidity analysis and regulatory reform are not a part of the legal frame in which inflation targeting has been cast under Section 45Z of the RBI Act) suggestion of encouragement of the MPC.
Market-friendly policy
Such a strategy would be market friendly and would not disturb the yield curve, given the fact that the long rate of interest has been somewhat sticky and would not be inclined to move up in view of the limited possibility of high growth prospects.
MPC will be mindful of the limited fiscal space and the difficult external current account deficit. In view of the much talked about prevalence of recessionary conditions in much of the developed world and China, India’s export prospects are not bright. Besides, foreign remittances of Indian expatriates would either shrink or just be stable. To expect the rupee depreciation to improve export prospects is close to day-dreaming given the external trading environment and recessionary conditions prevailing overseas.
Ideally, the meeting could still be postponed to end-May or early June to enable the Committee to have more credible information about the world economic outlook and the India’s own economic metrics. After all decisions cannot be taken on some idiosyncratic assumptions in the midst of uncertainty.
The writer is a former Executive Director of the RBI and currently an independent economic analyst. (Through The Billion Press)
Published on April 2, 2026