RBI Faces Policy Dilemma in Upcoming MPC Meeting Amid Rising Global Risks

RBI Expected to Maintain Interest Rate Pause Amid Elevated Global Risks

The Reserve Bank of India (RBI) is likely to maintain its pause on interest rates at its first monetary policy committee (MPC) review of FY27 next week, despite heightened global risks and a more complicated macroeconomic backdrop.

Radhika Rao, Executive Director and Senior Economist at DBS Bank, said that the RBI will stay pat on interest rates, balancing the need to control inflation, support growth, and manage external stability. The central bank will address specific pockets of strain through liquidity and targeted measures, rather than shifting its policy stance towards tightness.

Macro Economic Landscape Changes

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The macroeconomic landscape has changed significantly since the February 2026 rate review. While tariff risks have decreased following the US Supreme Court ruling, external risks have increased, particularly due to rising global oil prices and heightened geopolitical tensions. Financial markets have shown signs of stress, with rising bond yields and currency depreciation, despite earlier liquidity support from the RBI.

The RBI is expected to focus on liquidity management, ensuring adequate liquidity in money markets and the banking system to prevent frictional shortages. This will be achieved through repo auctions deployed opportunistically to maintain liquidity around the preferred cushion.

Inflation and Energy Prices

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Domestic inflation is coming off a low base, with FY26 CPI averaging 2.0–2.2%. However, the recent increase in energy prices could pose a risk to inflation, particularly if core inflation and second-round effects materialize. The RBI is expected to keep rates on hold in April, while addressing specific pockets of strain through liquidity and targeted measures.

The rupee has reached the psychological level of Rs 95 per US dollar, and bond yields have crossed the 7% threshold. A wider energy import bill and subdued demand for goods exports could widen the current account deficit to around –1.8% of GDP, compared with the baseline of –1.3%. This could pave the way for a third consecutive balance of payments deficit in FY27, a first for the economy.

RBI's Liquidity Operations

The RBI has been using liquidity operations more actively in recent weeks. The central bank is likely to focus on liquidity management from two perspectives: ensuring adequate liquidity in money markets and the banking system, and supporting working-capital requirements for smaller enterprises and exporters.

The Federal Reserve's policy stance remains an important input in the RBI's Monetary Policy Committee framework, although domestic factors are likely to carry equal weight. Any shift towards tightening will depend primarily on the trajectory of the rupee and the risk of persistently higher inflation, especially the emergence of second-round effects and the potential unanchoring of inflation expectations.