RBI policy: Why a hike in rates to tame the oil shock would be a mistake

RBI has already over-achieved its inflation mandate; it needs to focus more on its growth objective

The rise in oil prices shouldn’t prompt the Reserve Bank of India to hike rates -- growth is below potential, and the government is controlling the pass-through to domestic prices. What’s more, monetary policy is relatively ineffective against cost-push inflation. Even so, the RBI has a strong -- and in our view, unwarranted – hawkish bias. Our base case remains a shift to an accommodative stance and a rate cut in December, as inflation and growth surprise on the downside.

Given what’s happening with oil prices and the RBI’s hawkish bias though, it’s prudent to consider risks to our base