Repo rate hike not on the cards, for now, says Ram Singh, external member of MPC

External member of the Monetary Policy Committee (MPC), Ram Singh, tells Rozebud Gonsalves in an email interview about what would indicate the onset of second-round effects of persistently high energy costs, likely open market operations in FY27, and growth forecasts for an economy facing global trade headwinds. But he adds an increase in policy rates isn't being considered now. Edited excerpts:

The minutes maintain the current inflation shock is supply driven. At what point would the MPC consider that second-round effects have set in, and is a rate hike the appropriate response to counter it?

We will have to watch out for the second-round effects, that is, if and when the higher energy costs ripple through the rest of the economy, putting upward pressure on downstream products, such as petrochemical derivatives. Material increases in these prices and indications of the wage-price spiral would signal the onset of second-round effects. Several factors can help contain these effects - our huge refining capacity (1/5th of the world), excess capacity in power production, and the nudge provided by conflict to households and commercial sectors to increase the share of electricity in their energy basket.


Also Read: RBI's state of economy report flags upside risks to inflation due to supply shock and weather uncertainties

Nonetheless, the incoming price data will determine the next course of action for the monetary policy. All considered, I expect the West Asia conflict to be resolved soon, and, therefore, the overall inflationary impact to be a gradual, moderate price rise. An increase in repo rate is not on the cards, as of now.

How comfortable is the RBI with the current level of forex reserves, especially given the sizeable forward book and rising crude import costs? While the Governor highlighted a 10-11 month import cover in the February MPC, how would that metric evolve if elevated oil prices persist for another 3-6 months?

Obviously, if elevated oil prices persist at current levels for another 3-6 months, the passthrough would become inevitable, with implications for inflation, imports, and hence the BOP. But I consider it an unlikely scenario as persistently high crude prices will hurt all economies. Therefore, it is in the interest of all parties to avoid the conflict from persisting for months.

Our foreign exchange reserves prospects are benign even after factoring in the forward book, which represents future dollar obligations and reduces the liquidity of the 'headline' reserves. There are several positives, both in the current and capital accounts, which can offset the pressures from elevated import bills and the forward book to a great extent.

In FY26 we had over ₹8 lakh crore of open market operation (purchases). Would we see a similar quantum of OMO purchases in FY27 too?

RBI Governor Sanjay Malhotra has reiterated the RBI's commitment to ensuring adequate liquidity in the future as well. In FY 27 too, I expect the RBI will take appropriate measures, including OMO purchases, as and when needed, to ensure enough liquidity in the system.

Also Read: Central banks look through inflation until entrenched, no evidence of second-round effects: Dy Gov Poonam Gupta

GDP forecasts suggest the supply side shocks are isolated to only Q1FY27. How much would be the downside risks if the shocks spillover to Q2FY27? What is your current assessment of domestic growth, based on the data released so far?

As of now, the growth forecast is revised downward by 50-60 bps. While the direction of the impacts of the West Asia conflict and El Nino disturbances on growth and inflation is clear, the magnitude of the impact will depend on how long they last. It is difficult to quantify the downside risks of the conflict persisting beyond the coming weeks. We should note that the economic fundamentals - private demand, credit growth rate, aggregate capex and services sector growth remain robust.

After a 11% depreciation in the rupee in FY26, what's the appropriate depreciation for the currency in FY27, given our external condition?
A: As a consequence of the significant increase in crude oil prices in FY27, the economy has been hit by an adverse terms-of-trade shock. Letting its effect pass through the exchange rate was inevitable and desirable. The INR depreciation during the last one month reflects this. Unless the West Asia conflicts persist for months (in my view, a highly unlikely scenario), I expect the INR exchange rate to stabilise.

What is the MPC’s implicit crude price assumption beyond the stated $85/bbl, and how sensitive are the projections to deviations?
A: Goldman Sachs has forecast a Brent price of $71/b for Q4 2026. The U.S. Energy Information Administration expects Brent to fall to $76/b in 2027. As of now, the MPC has worked with the assumption of $85/bbl. Hopefully, in the coming weeks, we will have more clarity on the crude oil prices and their implications for the inflation and growth trajectories.