RBI may not delay change in stance as impact of Iran-Israel tension looks marginal

Reserve Bank of India

The escalating tension between Israel and Iran is unlikely to force the Reserve Bank of India (RBI) to delay the change in stance because of its marginal impact and limited spurt in crude oil prices, experts said.

Most experts believe that the central bank may change the monetary policy stance to 'neutral' in the December policy meeting and maintain status quo in October policy.

The RBI has been maintaining the 'withdrawal of accommodation' stance so far.

A 'neutral' stance suggests that the central bank can lower or raise the interest rate. Typically, this position is adopted when the policy priority is equal on both fronts — inflation and growth.

"The Middle East issue has led to oil prices moving up and could create some noises. More important will be the US elections and how tariffs are raised and what could be the implication for supply chains across the world. However, we were never expecting any action either on rates or on stance," said Indranil Pan, chief economist at YES Bank.

The meeting of the Monetary Policy Committee (MPC) of the RBI to decide on interest rates, started on October 7. It will deliver the decision on October 9.

According to a Moneycontrol poll of 12 bankers, economists and fund managers, the MPC is expected to keep the policy repo rate unchanged, as the growth-inflation risks have not yet turned dramatically. However, the expectation of a change in stance and an interest rate cut in the next quarterly monetary policy meeting in December gathers momentum.

The two West Asian nations crossed swords after Iran fired around 181 ballistic missiles at Israel in retaliation to the war in Gaza against the Hamas of Palestine, Houthis of Yemen and the Hezbollah of Lebanon. Following the October 1 missile attack, Israeli Prime Minister Benjamin Netanyahu warned that Iran would have to “pay for its attack”.

The attacks have jacked up crude oil prices, but experts said that the impact on inflation in India will be marginal since it has been seen that only when the petroleum prices rise by $10 a barrel or more, India's current account deficit widens by 0.55 percent. The CPI inflation increases by 0.3 percent or 30 bps in effect. To put things in context, oil price has a deep implication on India’s inflation, given that it constitutes major portion of the nation’s import bill.

"We did not expect a change in stance in October and a combination of Middle East tensions and spike in US yields on paring of quantum of rate cut forecast from the Fed in the near-term post-strong labour market data strengthens the case further," said Kanika Pasricha, chief economic advisor to the Union Bank of India.

On the inflation front, economists said the central bank may keep its projection unchanged. Madhavi Arora, lead economist at Emkay Global Financial Services, said a change in projections on growth and inflation is unlikely as the geopolitical tension will not impact the RBI policies.