India's June MPC Preview: Shifts in Key Drivers Since Last RBI Policy Review

Reserve Bank of India Faces Crucial MPC Decision on June 5 Amid Ongoing Geopolitical Tensions

The Reserve Bank of India (RBI) is set to make a pivotal decision on June 5, considering multiple factors that have been impacting the country's macroeconomic conditions. These factors include stubbornly high Brent crude prices, a volatile rupee, and the inflation and growth trajectory.

Since the April monetary policy committee (MPC) review, the country's macroeconomic conditions have been swinging like a pendulum due to ongoing geopolitical tensions between the United States and Iran. The tensions have led to a sharp surge in Brent crude prices, with prices reaching as high as $126 per barrel by the end of April. Although oil prices have stabilized at around $90-$95 per barrel, risks remain if the situation escalates further.

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The RBI is likely to raise its estimates of Brent crude prices towards $90-$95 per barrel, as compared to $85 per barrel before. The central bank will also consider the volatility in the USD/INR exchange rate, which has depreciated by about 2.5 percent since the last MPC in April. On a year-to-date basis, the rupee has fallen by about 5 percent.

The RBI has been selling off its foreign exchange reserves to protect the rupee, with sales worth nearly $20 billion between April 17 and May 22. As of May, the RBI's FX reserves stand at about $681.4 billion, down from $703.3 billion in April.

The RBI's decision will also be influenced by the country's inflation and growth trajectory. In April, the RBI projected FY27 GDP growth at 6.9 percent and inflation at 4.6 percent. However, these figures could come under jeopardy considering the elevated Brent crude prices. The inflation print in April came in at 3.48 percent, which is within the RBI's mandate of between 2 percent and 6 percent. However, any sharp spike in CPI may warrant a rethink by the central bank on the trajectory of interest rates.

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The central government's announcement of a fuel price hike in four phases, starting on May 15, has resulted in a cumulative raise of about Rs 7.50 per liter for both petrol and diesel. Economists expect the consumer price index (CPI) to rise by about 30-40 basis points in the coming months due to the pass-through of these prices. The El Niño effect will also affect the inflationary outlook, leading to an increase in food prices.

The RBI is likely to flag a cloudy Brent outlook amid lingering geopolitical risks and the rising risk of El Niño, which could lead to a revision of its FY27 inflation forecast and downward revisions to growth projections.