MPC Minutes: Disruption In Hormuz Pose Downside Risk To Growth & Upside Risk To Inflation
“Overall, geopolitical uncertainties have intensified with the conflict widening its spread over the last month": Sanjay Malhotra governor RBI
MUMBAI: The Reserve Bank of India’s (RBI) minutes of the April Monetary Policy Committee (MPC) meeting released on Wednesday highlighted concerns around growth and inflation mix amid the ongoing West Asia conflict. The Committee was of the view that elevated energy and other commodity prices coupled with supply shock due to disruptions in the Strait of Hormuz pose significant downside risks to India’s growth outlook and upside risks to inflation, even as the economy remains resilient.
The members noted that the pass-through of higher oil prices has been limited as of now but the sustenance of the same remains difficult. Policymakers advocated caution in maintaining a “neutral” stance which provides flexibility to act on either side.
“Overall, geopolitical uncertainties have intensified with the conflict widening its spread over the last month. As a result, supply chain disruptions, that may take longer to subside fully and restore the logistics network, pose downside risks to growth and upside risks to inflation. Nevertheless, the Indian economy is on a much stronger footing at the current juncture than at any time before to withstand these shocks,” said Sanjay Malhotra governor RBI.
“If the conflict remains unresolved for a long duration, it can make the task of central banks arduous in their endeavour to rein in inflation expectations while minimising growth sacrifice” he added.
The MPC this month kept the policy rate unchanged at 5.25 per cent while retaining the neutral stance.
Meanwhile, the RBI deputy governor T Rabi Sankar at an event marking the completion of Clearing Corporation of India Ltd's 25 years said that the move to cap banks' net open position (NOP) in onshore forex market to $100 million was taken to weed out volatility in the currency market and would be lifted once rupee stabilises.
“All that was done was to deal with a temporary event that created a large volatility in the market. Once that is taken care of, we should be back on track in what we do," said Sankar.
The market was very liquid and the price depended on demand and supply, he said. "We only come in when there is excessive and disruptive volatility."
On lifting the existing $100 million cap under the net open position rules for banks, Sankar said that those decisions will be taken in due course.
The RBI on Monday partially rolled back its directives taken earlier this month to curb excessive speculation in rupee. In a notification, the central bank withdrew two key restrictions. One, allowing authorised dealers including banks and financial institutions, to once again offer non-deliverable forwards (NDFs) to both Indian residents and overseas users.
Secondly, it has also removed the ban on users rebooking foreign exchange derivative contracts that were cancelled after April 1. However, it did not lift the $100 million cap under the net open position rules for banks.
These measures were introduced as the rupee breached 95 per dollar mark for the first time in late March due to a combination of rising crude oil prices, persistent geopolitical tensions, foreign investor outflows, and a strong dollar demand globally. The currency has recovered more than 2 per cent after the first set of measures were announced on March 27.
