- Reserve Bank of India expects major advanced economy central banks to tighten policy
- RBI's MPC kept policy repo rate unchanged at 5.25% and maintained a neutral stance
- India's retail inflation rose to 3.93% in May, driven by food and fuel price increases
The Reserve Bank of India cautioned that it sees major advanced economy central banks to shift to policy tightening in the wake of volatile energy markets and increased inflationary risks, caused by the West Asia conflict.
"Major advanced economy central banks are likely to pivot towards monetary policy tightening," the central bank said in its official MPC minutes release.
RBI's Monetary Policy Committee unanimously decided to keep the policy repo rate unchanged at 5.25% earlier in June for the third time in a row; the central bank also maintained a 'neutral' stance.
However, it flagged that faced with difficult trade-offs in the context of the Iran war and energy disruption, monetary policy has turned more 'cautious'.
India's retail inflation soared to 3.93% in May from 3.48% in the preceding month, driven by a rise in food prices amid multiple hikes in rates of petrol and diesel, along with LPG and CNG.
"One fallout is that with rising global inflationary pressures, the outlook for major global central banks rate actions has now shifted to rate pause or hikes, further enhancing spill-over effects on capital flows into India," highlighted economist Saugata Bhattacharya.
Notably, the US Federal Reserve also held the key lending rates in the 3.5%-3.75% target range for the fourth time in a row. The decision came in light of inflation remaining "well above" the committee's 2% goal.
On top of that, the Federal Open Market Committee (FOMC) led by new Chair Kevin Warsh, was split to the middle on the prospect of at least one rate hike in 2026.
A hawkish pivot could be on the cards as nine out of the 18 Fed officials, in their forecasts, pointed to a likelihood of at least one rate hike in 2026. US inflation soared to 4.2% on an annual basis, marking the sharpest jump in three years, driven by an increase in gasoline prices due to supply chain disruptions in West Asia.
Energy Shock, Rain Deficit, And Other Macro Headwinds
In addition to the ongoing commodity supply shocks, the official meteorological forecasts of deficient rains signal the need for heightened awareness on agriculture output and prices, pointed out Bhattacharya.
"Energy prices are unlikely, in the near or even the medium term, to return to their pre-conflict levels," he said while adding that RBI survey shows a consistent and significant rise in one year ahead inflation expectations.
According to the economist, MPC forecasts on growth and inflation signal a need for caution in changing the policy rate, "in terms of the risks of either metric", despite the quantitative forecasts having only limited traction in face of the prevailing uncertainty.
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