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RBI to Hold Rates Despite Oil-Led Inflation: Supply Shock Not Demand

The Reserve Bank of India is unlikely to raise interest rates immediately in response to inflationary pressures from rising crude oil prices, according to a Natixis economist. The current situation is viewed as a supply-side shock stemming from geopolitical conflict, not a demand-driven problem that rate hikes typically address. A prolonged crisis could see higher costs feed into transportation and food, increasing inflation over time. The RBI's next policy move is still expected to be a hike, but it will likely wait and may instead use tools to stabilize the rupee or financial markets if needed.

Key Points: RBI Unlikely to Hike Rates Now on Oil Price Shock: Natixis

  • RBI likely to hold rates despite oil price rise
  • Inflation seen as supply-driven, not demand-led
  • Prolonged conflict could push up broader costs
  • Policy may focus on rupee stability over hikes
  • Next RBI move still expected to be a hike, but delayed
3 min read

RBI unlikely to hike rates now despite crude inflation as it is supply-driven shock, not demand: Natixis Economist

RBI may delay rate hikes as crude-driven inflation is a supply shock, not demand-led, says Natixis economist. Policy focus may shift to rupee stability.

"I don't think any central bank is going to hike rates right now, just because we have a situation where we have a supply shock. - Trinh Nguyen"

New Delhi, March 13

The Reserve Bank of India is unlikely to immediately raise interest rates despite inflationary pressures from rising crude oil prices, as the current situation reflects a supply-side shock rather than demand-driven inflation, according to Trinh Nguyen, Senior economist, Emerging Asia at Natixis.

In an exclusive conversation with ANI while discussing the ongoing energy crisis triggered by the conflict in West Asia, Nguyen said central banks are unlikely to react with immediate rate hikes as the situation is still evolving.

"I don't think any central bank is going to hike rates right now, just because we have a situation where we have a supply shock. It's so early, and we don't know how long the duration of this is," she said.

Nguyen explained that raising interest rates affects the entire economy and may not solve the core issue, which currently stems from disruptions in energy supply rather than excessive demand.

"When you raise interest rates, it goes through the whole economy. Sectors like real estate are very sensitive to interest rates. But that is not going to solve the supply problem that we have right now," she said.

She added that policymakers may instead rely on other measures, similar to approaches adopted during the COVID-19 period, rather than using interest rates as the primary tool.

According to Nguyen, if the conflict continues for a longer duration, the energy shock could gradually spread across the broader economy and increase inflationary pressures.

"The longer the duration of this is, it will feed through transportation costs, flying costs and eventually food costs. Then inflation pressure will go higher," she said.

Nguyen noted that while inflation may rise over time, the starting point remains relatively low due to factors such as a good monsoon season and changes in inflation measurement weights.

"At the moment, rates are low because of many factors, including a good monsoon season and the rebasing of weights. The low base also means inflation is starting from a lower level," she said.

Nguyen said the next policy move by the RBI could eventually be a rate hike, but not immediately.

"The next move is probably going to be a hike for the RBI, but it's not going to do that now. Like most central banks in the region, it will likely wait," she said.

She also suggested that monetary policy could instead be used to stabilise the rupee or calm excessive volatility in financial markets if required.

"If the rupee is excessively sold or markets face a giant sell-off, monetary policy can be used to smooth volatility and restore confidence," she added.

- ANI

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Reader Comments

P
Priya S
Good to hear a measured perspective. But as a common citizen, petrol prices are already pinching our household budget. The government should look at reducing taxes on fuel to provide some immediate relief, regardless of what RBI does.
R
Rohit P
Makes sense. You don't use a hammer to fix a leaking pipe. The inflation is from external supply shock, not because Indians are spending too much. Focus should be on securing energy supplies and managing the rupee.
S
Sarah B
While I agree with the economist's analysis in principle, I have a respectful criticism. The RBI often seems to wait too long to act, and then has to make aggressive moves. A more proactive communication strategy about their contingency plans would boost market confidence.
K
Karthik V
The mention of a good monsoon is key. If the agri output is strong, it will keep food prices in check and give RBI more room to breathe. Fingers crossed for the weather gods this year! Our economy still runs on the monsoon.
M
Michael C
Interesting point about using policy to stabilize the rupee. With FIIs pulling out, currency volatility is a bigger near-term risk than inflation for the macro picture. Smart move to keep that tool in reserve.

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