Experts Say Assumptions on Brent Crude Prices, Rupee Have Become Obsolete Ahead of June MPC Review

RBI Faces Tougher Backdrop in June MPC Review

The Reserve Bank of India (RBI) is set to face a more challenging backdrop in its upcoming monetary policy committee (MPC) review in June. In April, RBI Governor Sanjay Malhotra announced that the MPC had decided to maintain interest rates at 5.25 percent, adopting an 'accommodative stance'. However, market participants now believe that the assumptions the RBI had for Brent crude prices and the rupee have become obsolete due to the ongoing Middle East tensions.

The conflict in West Asia has had a significant impact on the economy, leading to a sharp currency depreciation and stubbornly persistent Brent crude prices. The Indian rupee has sunk to an all-time low of Rs 96.96 per dollar on May 20, with oil prices crossing $110 per barrel. The uncertainty surrounding a peace deal between the United States and Iran has added pressure on both the currency and fixed-income markets.

Comparison of Brent Crude Prices

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The rupee has made a slight recovery from its record lows, rising to end at Rs 95.23 per dollar on May 25, but uncertainty remains elevated. US President Donald Trump has mentioned that the Strait of Hormuz will remain under blockade until a definite peace deal is signed with Iran. The RBI had introduced stringent measures to curb excessive speculative trades in the offshore forwards markets in April, but some of these measures have since been relaxed.

India's benchmark 10-year yield has been squeezed higher as oil prices feed through inflation and fiscal concerns. The yield is currently fluctuating between 7 percent and 7.10 percent. Economists had initially set their Brent crude price assumptions at $65 per barrel, but have since revised them to between $85 to $90 per barrel for FY27. The RBI's April baseline of $85 per barrel is now under threat, with many economists predicting that the baseline assumptions will be shifted towards $90-$95 per barrel.

Market participants are now expecting a rate hike in the June MPC meeting, even though the majority consensus is that the RBI will keep interest rates steady. A Moneycontrol poll showed that a growing minority of market participants are expecting a rate hike, with all of them agreeing that at least a 50 basis point rate hike will be on the cards in FY27. Even if the RBI does not immediately hike in the upcoming June MPC review, heightened caution will likely be the theme, with the narrative of rate trajectory materially shifting due to the existing war conditions.

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