MUMBAI: The Reserve Bank of India kept its key policy rate unchanged on Wednesday while warning of lower growth and higher inflation as the Middle East crisis reverses a "Goldilocks" phase for the South Asian economy.
Overnight, the U.S and Iran announced a two-week ceasefire in hostilities after more than a month of fighting, which pushed oil prices sharply higher and disrupted the supply of gas to economies the world over.
India, which imports 90% of its oil supplies, is seen as among the most vulnerable if disruptions caused by the war stretch out. Reflecting that nervousness, the Indian rupee fell to a record low as foreign investors pulled nearly $19 billion between March and April so far.
The central bank's rate panel, however, thought "it is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook," RBI Governor Sanjay Malhotra said while announcing the policy decision.
The RBI's six-member monetary policy committee voted to keep the repo rate steady at 5.25%.
All six members of the rate panel, which includes three central bank officials and three external appointees, voted to hold rates. The MPC also decided to continue with its "neutral" stance.
Sixty-nine of 71 economists in a March 23-26 Reuters poll forecast the Reserve Bank of India would keep the benchmark repo rate unchanged.
While inflation remains in check, risks have risen and the possibility of second round effects of oil price increases renders the outlook uncertain, Malhotra said.
"The risks are on the upside."
High frequency indicators suggest India's economy remains strong but higher oil prices and shortages of key inputs like gas could impact this momentum, the governor said.
"The initial supply shock can potentially transform into a demand shock over the medium term if the restoration of supply chains is delayed," Malhotra said.
World oil prices fell sharply in Asia on Wednesday on news of the ceasefire but they remain well above levels a few months ago.
"The RBI MPC policy outlook (has) shifted from a 'benign inflation-strong growth' scenario to a more 'cautious balancing act'," said Radhika Rao, senior economist at DBS Bank in Singapore.
Rao expects the central bank to watch for any second-round effects of the supply shock to materialise before interest rate hikes become a realistic consideration.
WEAKER GROWTH, HIGHER INFLATION
The central bank released its first economic forecasts for the current financial year, with GDP growth expected to fall to 6.9% in 2026-27 from an expected 7.6% in the year ended March 31, 2026.
Average inflation for the year is seen at 4.6%, within the central bank's target band of 2-6%. For the 11 months of 2025-26 for which data is available, average inflation was at 1.95%.
The central bank also, for the first time, offered a forecast for core inflation, which it sees at 4.4% this financial year.
The central bank has assumed an average oil price of $85 per barrel to arrive at its forecasts.
A 10% increase in prices above those levels could push up inflation by 50 basis points and pare growth by 15 basis points, the central bank said in a separate Monetary Policy Report.
"We believe the 6.9% growth estimate put out by RBI for 2026-27 may need a reassessment as (a return to) full pre-war energy export volumes might take three to six months due to backlogs, diverted tankers, and partial infrastructure damage," said Garima Kapoor, economist at Elara Securities in Mumbai.
"We do not see the MPC hiking policy rates until CPI inflation durably surpasses 6% and inflation expectations get unhinged," she said.
India's economy was forecast to grow by more than 7% in the fiscal year that began on April 1, according to government estimates released in February, while inflation was expected to remain close to the central bank's target of 4%.
India's benchmark 10-year bond yield moved slightly higher to 6.92% after the policy decision, while the rupee was marginally weaker 92.62. Benchmark equity indexes added to their gains, up nearly 4% for the day.
The central bank said the rupee has depreciated more than average despite strong fundamentals. It fell 11% in financial year 2025-26, the most in over a decade.
The RBI will continue to "judiciously contain excessive or disruptive volatility to ensure that self-fulfilling expectations do not exacerbate currency movements beyond what is warranted by fundamentals," Malhotra said.
He reiterated the central bank will continue to ensure adequate liquidity in the banking system to meet the economy's needs. - Reuters
