Speaking with ET Now, Tanvee Gupta Jain, Chief India Economist, UBS underscored how dramatically the landscape has evolved since the previous policy meeting. “You are right in pointing out that the macro situation has changed a lot since the last policy. I mean that time the entire focus was on the having a trade deal with the US. We were signing so many of FTAs and the outlook was looking very good. But right now, I would say, the external risk have come to the forefront and especially at a time because Indian economy remains vulnerable to higher oil prices,” she said.
India’s dependence on imported crude—nearly 88% of its requirement—makes it particularly sensitive to geopolitical disruptions, especially in West Asia. With almost half of these imports sourced from the region, the ongoing conflict has raised concerns about both inflation and growth.
Jain pointed out that the RBI faces a delicate balancing act. “I would say at this point RBI has a lot more things to look out. Definitely the downside risks to growth are going up. Inflationary concerns are rising,” she said, adding that the central bank is likely to maintain a cautious stance. “In our base case we are expecting RBI to either continue with the neutral stance or announce a withdrawal of accommodation. At this point it is too early to expect the RBI to shift to a tightening stance because the things are still unfolding.”
According to UBS estimates, if crude oil averages around $100 per barrel, India’s GDP growth could moderate to about 6.3%, while inflation may climb above 5%, compared to earlier expectations of 7% growth.
Currency Takes Centre Stage
While interest rates and liquidity remain important, Jain emphasized that the real focus of the RBI’s policy response may lie elsewhere. “I would say that rather the more important point of view from an RBI policy tomorrow, more than liquidity and more than policy rate is, how are they going to tackle the INR weakness,” she said.
The Indian rupee has underperformed in recent months, prompting the RBI to deploy regulatory measures such as curbs on FX positions and restrictions in the non-deliverable forward (NDF) market. However, Jain cautioned that these steps may not address deeper structural imbalances.
“Recent moves by the RBI… are more regulatory, more to curb speculation. But they are not likely to fix the structural FX imbalances,” she explained.
Liquidity support measures such as FX swaps and open market operations (OMOs) are expected, but the broader challenge remains stabilizing the currency amid global volatility.
Echoes of 2013, But Not Quite the Same
Market participants have drawn parallels between the current situation and the 2013 taper tantrum, when the rupee saw a sharp depreciation. Jain acknowledged the comparison but stressed key differences.
“A lot of investors… are comparing this current episode with the 2013 taper tantrum… But that time India was an outlier. Macro imbalances were quite high. This time around it is a global shock,” she said.
While India’s macro fundamentals are relatively stronger today, the scale of the external shock—particularly if oil prices remain elevated—poses a significant risk.
Limits of Traditional Tools
On the question of whether tools like FCNR deposits could be reintroduced, Jain remained cautious. “Yes, NRI deposit is one option… maybe one of the last things you want to pull out from the bag,” she said, noting that such measures would only partially address the funding gap.
She also highlighted concerns around India’s current account deficit, which could widen significantly if oil prices remain elevated. “We would be staring at a current account deficit of more than $100 billion at this point in time,” she warned.
Stagflation Risks and Policy Trade-offs
The possibility of a stagflationary environment—characterized by slowing growth and rising inflation—has also entered the conversation.
“I would say in a scenario what we are talking about maybe if oil prices sustain higher we could be looking at a stagflationary kind of scenario, not only for India but globally,” Jain said.
In such a scenario, she believes fiscal policy, rather than monetary policy, should take the lead. “It is always a fiscal policy which should do the heavy lifting more than the monetary policy,” she noted, arguing that rate hikes may not be effective against supply-driven inflation.
Government’s Role and Fiscal Space
The government has already taken steps to cushion the impact, including a ₹10 per litre cut in fuel prices. However, Jain cautioned that there are limits to how much can be absorbed.
“I still think they still have some more fiscal space… but beyond a point you need to let the shock pass on to the consumers,” she said, pointing to the importance of demand adjustment in managing macro imbalances.
Two Scenarios, Diverging Outcomes
Looking ahead, Jain outlined two possible paths depending on how the geopolitical situation evolves.
If the crisis is short-lived and oil stabilizes around $95–$100 per barrel, GDP growth could settle at around 6.3%, with inflation rising moderately. However, in a prolonged disruption scenario with oil at $150 per barrel, growth could slow sharply to 5.5%, while inflation may breach the RBI’s upper tolerance band of 6%.
“I think the impact is largely asymmetric and most important is the duration of the impact,” she said, emphasizing that both the level and persistence of oil prices will determine the trajectory of India’s macroeconomic outlook.
As the RBI prepares to announce its policy decision, experts feel this is not just another policy review, but a defining moment that could shape the economic narrative in the months ahead.
