RBI holds rates, signals caution amid Middle East war shock

The Reserve Bank of India (RBI) kept its benchmark interest rate unchanged on Wednesday, 8 April, pausing after earlier easing moves as the war in the Middle East complicated the inflation outlook and darkened the growth picture for the year ahead.

The six-member Monetary Policy Committee (MPC) voted unanimously to hold the repo rate at 5.25% and stay with a neutral stance, with RBI governor Sanjay Malhotra saying the bank would “wait and watch” until there is clearer evidence on how the external shock feeds through to the domestic economy.

The decision leaves the standing deposit facility rate at 5.0% and the marginal standing facility and bank rate at 5.5%. It also underlines how sharply the policy conversation has shifted. Just weeks ago, the debate was over how much room the RBI still had to support growth. By Wednesday, the focus had swung to how long it could afford to sit still while oil prices, input shortages and currency volatility threatened to push up prices and sap momentum.

Malhotra’s message was cautious rather than alarmist. Inflation, he said, remains under control for now, and high-frequency indicators still point to a resilient economy. But he also warned that the Middle East conflict had raised upside risks to prices and that shortages of critical inputs such as gas, together with costlier crude, could start to hurt activity more broadly.

“The supply shock being faced by the economy could turn into a demand shock,” he said, laying out the case for a pause rather than another cut.

The central bank projected real gross domestic product (GDP) growth at 6.9% for the year that began on 1 April, slower than the 7.6% pace it expects for the year ended 31 March 2026.

It sees quarterly growth at 6.8% in the first quarter, 6.7% in the second, 7.0% in the third and 7.2% in the fourth, implying a soft patch in the first half before a gradual recovery later in the year.

On inflation, the RBI now expects consumer prices to average 4.6% in fiscal 2027, still within its 2% to 6% tolerance band but above the 4% target that anchors policy.

Its quarterly path shows inflation at 4.0% in the first quarter, 4.4% in the second, rising to 5.2% in the third before easing to 4.7% in the fourth.

In a new layer of guidance, the central bank also published a core inflation forecast of 4.4%, suggesting that while underlying price pressures remain contained for now, policymakers are preparing markets for stickier inflation if external shocks linger.

The immediate market response was subdued, partly because the decision was widely expected and partly because a ceasefire announcement tied to the US-Iran conflict had already improved sentiment before the policy statement landed.

The rupee was trading around 92.54 to the dollar following the announcement, after strengthening earlier in the day from 93.0075 on Tuesday.

India’s benchmark 10-year bond yield edged up to about 6.92%, while equity benchmarks held on to gains of roughly 3.6% spurred by the broader relief rally in risk assets and a near 14% drop in Brent crude.

Vikram Chhabra, senior economist at 360 ONE Asset, said the decision was broadly in line with expectations, with the temporary ceasefire easing tensions only marginally while upside inflation risks and downside growth risks remained.

Chhabra added that uncertainty over the monsoon could further complicate the inflation outlook. Private forecaster Skymet said on Tuesday, 7 April, that India could see a below-normal monsoon this year, with El Niño likely to weaken rainfall in the second half of the season. El Niño is a periodic warming of surface waters in the central and eastern Pacific that often disrupts rainfall patterns globally and can weaken India’s monsoon.

The RBI’s policy note came after days of stress in India’s currency and funding markets, with the central bank already leaning on a series of foreign-exchange steps to buffer the rupee from offshore pressure.

Ahead of the meeting, bankers had said the RBI was also unlikely to drain liquidity aggressively despite overnight rates slipping below the policy rate, because doing so risked tightening financial conditions just as oil and geopolitical uncertainty were already making investors skittish.

Reuters reported that system liquidity surplus stood near ₹4 trillion before the decision.

Analysts aid the RBI, in effect, is trying to balance three things at once: keep inflation expectations anchored, avoid choking off domestic demand, and preserve orderly market conditions while the external backdrop remains volatile.

The neutral stance gives it room in either direction, but Wednesday’s forecasts made clear that the hurdle for further easing has risen. Growth is still decent by global standards, yet slower. Inflation is still within the band, yet trending toward the upper half.

There was also a regulatory side note with potential significance for the banking sector.

In his policy speech, Malhotra said the RBI plans to revise guidelines so bank boards spend more time on policy matters and less on day-to-day operational issues.

The move followed tensions at HDFC Bank Ltd, where the chairman resigned recently amid disagreements over “values and ethics,” and Reuters previously reported that friction had centered in part on the board’s role in operational matters.

The proposed change is meant to sharpen governance lines at a time when the central bank is also asking lenders to stay focused on credit delivery and market stability.