Reserve Bank of India (RBI) on Wednesday kept key interest rates unchanged, choosing caution amid global uncertainty triggered by the West Asia conflict, even as a tentative ceasefire between the United States and Iran raised hopes of easing crude oil prices and stabilising markets.
Announcing the first monetary policy of FY26-27, RBI governor Sanjay Malhotra says the monetary policy committee (MPC) unanimously decided to retain the repo rate at 5.25%, while maintaining a neutral stance as it navigates a complex mix of resilient domestic growth and rising external risks.
"The MPC opined that the intensity and the duration of the conflict and the resultant damage to the energy and other infrastructure add risk to the inflation and growth outlooks. However, the fundamentals of the Indian economy are on a stronger footing, providing it with greater resilience to withstand shocks now than in the past. The economy is confronted with a supply shock. It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook. Accordingly, the MPC voted to keep the policy rate unchanged even as it remains vigilant, closely monitoring incoming information and assessing the balance of risks. The MPC also decided to continue with the neutral stance, retaining the flexibility to respond judiciously to incoming information," Mr Malhotra says.
The standing deposit facility (SDF) rate remains at 5%, and the marginal standing facility (MSF) rate and bank rate are at 5.50%.
Policy Pause amid Global Turmoil
The decision comes against the backdrop of a six-week-long conflict in West Asia that disrupted global supply chains, pushed up crude oil prices and heightened inflationary pressures for import-dependent economies such as India.
In his statement, RBI governor underscored the extraordinary global environment. “Global economy is facing unprecedented challenges from heightened geo-political tensions, the conflict in West Asia and the disruption in global supply chains,” he says.
While recent developments, including a US-Iran ceasefire, may offer temporary relief, RBI made it clear that risks remain elevated and uncertain.
Why RBI Held Rates
Explaining the rationale, MPC says inflation remains under control but faces upside risks, particularly from energy prices and supply disruptions.
“Headline inflation remains contained and below the target. However, upside risks… driven by increased energy price pressures… have increased,” the governor noted.
The central bank emphasised that the ongoing conflict represents a supply shock, warranting a wait-and-watch approach rather than immediate policy action.
“It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook,” the statement from RBI syas, explaining the decision to hold rates.
Growth Resilient but Risks Rising
Despite global headwinds, RBI projected India’s economy to remain relatively resilient.
Real gross domestic product (GDP) growth for FY25-26 is estimated at 7.6%, supported by strong consumption and investment demand. However, growth is expected to moderate to 6.9% in FY26-27 amid external pressures.
“Growth impulses continue to be supported by robust private consumption and investment demand,” Mr Malhotra says.
At the same time, RBI flagged multiple transmission channels through which the conflict could impact India — including higher energy prices, supply chain disruptions, weaker global demand, and financial market volatility.
“Elevated crude oil prices could increase imported inflation and widen the current account deficit,” the governor warned.
Strait of Hormuz a Key Risk
A major concern highlighted by the central bank is the vulnerability of global energy flows, particularly through the Strait of Hormuz.
Potential disruptions in the region could affect availability of critical inputs, raise logistics costs and dampen economic activity.
“Shocks to availability of inputs due to disruptions in the Strait of Hormuz are likely to impact growth,” the RBI noted, adding that government measures to secure supplies may help mitigate the impact.
Inflation Outlook and Projections
RBI projected CPI (consumer price index) inflation at 4.6% for FY26-27, within the mandated target band, though risks are tilted to the upside.
Inflation is expected to average around 4.0% in the first quarter, rise to about 4.4% in the second quarter, increase further to 5.2% in the third quarter, and moderate to 4.7% in the fourth quarter.
While food prices remain benign for now due to strong agricultural output and adequate buffer stocks, energy prices remain a key uncertainty.
External Sector and Liquidity
India’s external sector remains stable, with forex reserves at US$697.1bn (billion) as of early-April. RBI noted that India continues to be an attractive destination for foreign investment, particularly in greenfield projects.
At the same time, the central bank acknowledged pressures from capital outflows and global financial volatility.
On liquidity, RBI assured that it will remain proactive.
“We will ensure sufficient liquidity in the banking system to meet productive requirements of the Indian economy,” Mr Malhotra says.
New Inflation Mandate
This policy review also comes after the government recently renewed the inflation targeting framework, asking RBI to maintain CPI inflation at 4% with a tolerance band of plus or minus 2% for another five years till March 2031.
Outlook: Vigilance Amid Uncertainty
In his concluding remarks, the governor reiterated RBI’s cautious stance. “Global economic conditions and sentiments have soured after the outbreak of the West Asia conflict… We shall remain vigilant… and prioritise the best interest of the economy,” he says.
While the ceasefire in West Asia may provide near-term relief to oil prices and financial markets, RBI signalled that policy decisions will remain data-dependent, with a sharp focus on inflation risks and evolving global dynamics.
Additional Measures Announced
Alongside the policy decision, the RBI governor also unveiled a set of regulatory and structural measures aimed at improving ease of doing business, strengthening bank capital frameworks, and deepening financial markets.
To promote ease of doing business, the central bank proposed rationalising matters requiring the attention of bank boards to improve efficiency, and completed the consolidation of supervisory instructions in line with its earlier move to streamline over 9,000 regulations into simplified master directions. It also announced a significant step for MSMEs (micro, small and medium enterprises) by removing the due diligence requirement for onboarding on TReDS platforms, easing access to trade receivables financing.
On capital adequacy, RBI proposed easing norms by removing the condition related to non-performing asset (NPA) provisioning for inclusion of quarterly profits in capital calculations. It also plans to dispense with the requirement for banks to maintain an Investment Fluctuation Reserve, reflecting the evolution of the prudential framework.
To develop the money market, the central bank says it will allow additional categories of non-bank entities to participate in the term money market, which is currently limited to banks and standalone primary dealers. It also proposed to enhance borrowing limits for primary dealers to improve liquidity and market depth.
