Mumbai, April 3 If crude oil prices remain above USD 100 per barrel, headline inflation is likely to exceed 6 per cent, the upper limit of the RBI's tolerance band, and trigger interest rate hikes, a foreign brokerage has said.
Economists at HSBC said that consumer price inflation (CPI) will remain below 6 per cent if oil prices average below USD 100 per barrel, as per their models.
"... Sustained oil prices above USD 100/bbl would push inflation beyond 6 per cent, likely triggering interest rate hikes," the economists said, adding that they are at a "crossroads" given that Brent has averaged USD 100 in March.
Amid speculation ahead of next Wednesday's monetary policy announcement on whether the RBI will use interest rates to defend the rupee, the report suggested the risks of such a move.
"An interest-rate defense for the INR can be expensive when the growth drag becomes non-linear and intensifies quickly with higher oil prices," it said.
The economists recommended adopting a "neutral" stance on both the monetary and fiscal fronts for now, as supplies are yet to be cleared and stimulating demand can exacerbate inflation.
Pointing out that doing so would be similar to the experience during the COVID pandemic, the report said stimulating demand before supply was repaired led to high and persistent inflation back then.
"The lesson now is clear: avoid boosting demand too early. But this is a delicate balance. Policymakers don't want to overstimulate, but they also can't tighten so much that the growth slowdown deepens," it added.
Elaborating on the "neutral" prescription, it said this would mean keeping the fiscal deficit close to FY26 levels and raising petrol and diesel prices to help contain the fiscal deficit.
On the monetary side, the "flexible" inflation targeting framework allows inflation to stay within the 2-6 per cent range, it added.
If the ongoing energy shock persists for a few more weeks, the growth drag could begin to outweigh the inflation shock, it said.