Lower oil prices open door for MPC to time policy normalisation: ICICI Research
New Delhi, June 20
With oil prices down 16 per cent since the June Monetary Policy Committee meeting and geopolitical risks easing, the inflation outlook has improved and the MPC now has headroom to choose the timing of policy normalisation, ICICI Global Markets Economic Research Group said in a report.
ICICI Research noted that the growth-inflation balance has changed considerably since the policy meeting. "Since the June policy meeting, growth-inflation balance has changed considerably with oil prices falling by 16%. Hence, minutes should be seen in that context," the research group said. Brent crude was trading around USD 95/bbl during the meeting but has since declined substantially following a peace agreement and gradual opening of the Strait of Hormuz.
On inflation, the minutes showed concerns dominated the discussion at the time of the meeting, with members flagging elevated energy prices, logistics costs and a weak monsoon. ICICI Research highlighted that members acknowledged underlying inflation dynamics remain benign. "At the same time, some members pointed out that underlying inflation dynamics are still benign (Core ex. precious metals), while adding that the increase in inflation is largely driven by food and fuel components (supply driven)," the report said. With energy prices now substantially lower, the outlook for inflation has improved, though the monsoon would play an important role.
On growth, ICICI Research said members acknowledged resilience in domestic activity even as risks were flagged. "Members acknowledged the resilience in domestic growth so far, but added that lower exports to the Middle East, higher energy prices and weak rainfall (agri output) pose downside risks to growth," the brokerage noted. High frequency indicators such as automobile and tractor sales, bank credit and capacity utilisation showed resilience, while Q4FY26 GDP came in robust at 7.8% YoY after the policy.
ICICI Research expects the MPC to revise its inflation projections lower in the August meeting if oil prices stay around USD 80-85/bbl and the conflict does not re-escalate. "Should oil prices average around USD 80-85/bbl. going forward, the MPC would revise its inflation projections lower. As a result, the near-term odds of increasing the policy rate have reduced," the report said. The research group's base case is for a 50-75bps rate hike with August still a live call, depending on June CPI and core CPI prints. Otherwise, the MPC would have time to assess the inflation outlook later in the year, with monsoon progress and the sustainability of the peace agreement key determinants.
— ANI
Reader Comments
As someone who follows global economics, this report makes sense. The drop in oil prices and the peace agreement easing tensions in the Strait of Hormuz are definitely positive developments for inflation. India has a strong growth story, so waiting and watching before hiking rates seems prudent.
Finally some good news for the common man! If MPC can hold off on rate hikes, it will help with home loans and business borrowing. But I'm skeptical about how long oil prices will stay low. The Middle East situation can change anytime. The August meeting will be crucial.
I appreciate ICICI Research's analysis. The growth-inflation balance is indeed improving, but we mustn't ignore the risks from weak rainfall. Farmers will struggle if monsoon doesn't pick up, and that could drive food prices up again. MPC should keep a hawkish stance but avoid knee-jerk reactions.
Interesting perspective. 50-75bps rate cut potential is a big shift from earlier hawkish signals. The Q4 GDP at 7.8% is impressive, showing India's growth resilience. But developing economies like India need to be cautious with monetary policy. Let's see if the peace in the Gulf holds.
Good analysis from ICICI. But I feel the report is a bit too optimistic. Oil at $80-85/bbl is still high by historical standards. And core inflation excluding precious metals being benign doesn't tell the full story. The common man is still feeling the pinch of higher prices everywhere. Let's not pop the champagne just yet!
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