Status quo on repo rate to continue as RBI gauges impact of oil shock

oil price spike has worsened the external flow position further by widening the current account deficit and triggering large FPI capital outflows.While the Reserve Bank of India (RBI) has announced measures to curb speculation in the onshore forex market, the rupee's depreciation is likely to persist and add to inflationary pressures.At present, the headline inflation remains below the target rate and with the excise duty cuts, the central government has ensured that the near-term impact of the adverse shock on inflation and growth is contained.It is thus likely that the MPC will leave the repo rate unchanged at 5.25%, awaiting clarity on the duration of the oil market disruption, while acknowledging that higher oil prices have significantly increased the risk of inflation rising above 4% over the year.The policy stance is likely to be retained as neutral, providing the MPC with the flexibility to act appropriately depending on the evolving macro-economic conditions.The longer oil prices stay above $100 per barrel level, the greater will be the upward pressure on imported and overall inflation and downward pressure on real GDP growth. Thus, over the course of this fiscal year, the MPC will closely monitor disruptions to energy markets due to the West Asia conflict.

Members will weigh in on the risks to inflation and growth, and deviations from the inflation target and potential real GDP growth.The MPC will shift focus to keeping inflationary pressures in check, especially if the near-term inflation expectations of households rise sharply in response to higher fuel and food inflation. Persistence of inflationary pressures will depend on the duration and scale of the oil price surge and pass-through to the end consumers