New Delhi, April 2 (NationPress) A recent report indicates that the Reserve Bank of India is not expected to increase interest rates during its forthcoming Monetary Policy Committee (MPC) meeting next week, unless crude oil prices remain consistently above $100 per barrel. According to HSBC Global Investment Research, "our base case estimates oil to average $80 per barrel in 2026, which leads us to believe that rate hikes are unlikely." The report highlights that defending the rupee through interest rate hikes could be a costly strategy, particularly if the adverse effects of rising oil prices escalate unexpectedly.

The RBI's policy meeting is set for April 6 to April 8, marking the first gathering since the recent surge in energy prices driven by the conflict in West Asia, which saw Brent crude averaging approximately $100 per barrel in March.

This analysis follows the RBI's decision on March 27 to tighten the net open foreign exchange positions of onshore banks, raising questions about whether this would lead to an interest rate defense for the rupee. HSBC has countered this notion, asserting that the threshold for rate increases remains significantly high.

Moreover, the investment report notes that the ongoing energy crisis is distinct from previous oil price fluctuations, not only due to the heightened prices but also due to supply constraints across various energy sources, worsened by quota systems affecting downstream sectors.

HSBC cautions that if the energy shock continues in the coming weeks, the economic slowdown could start to overshadow inflationary pressures, echoing conditions seen during the pandemic rather than the oil shock of 2022.

On the inflation front, HSBC's projections suggest that if oil prices stay below $100 per barrel, inflation should remain within the RBI's upper tolerance limit of 6% under its flexible inflation targeting framework. However, if oil prices persist above $100, inflation could breach this threshold, possibly leading to interest rate hikes.

Learning from past experiences during the pandemic, HSBC advises policymakers to refrain from stimulating demand until supply issues are resolved. The report emphasizes that prior attempts to boost demand while supply was still disrupted resulted in persistent inflation, and the current challenge lies in finding the right balance to prevent excessive stimulation while avoiding deepening the growth slowdown.

On the fiscal aspect, HSBC recommends maintaining the fiscal deficit near FY26 levels, indicating that increasing petrol and diesel prices could help mitigate fiscal slippage.