Mumbai, April 8 – The Reserve Bank of India maintained its key policy rate unchanged on Wednesday, adopting a cautious approach while assessing the impact of the six-week Iran conflict on energy supplies, inflation, and economic growth.
The central bank's Monetary Policy Committee voted unanimously to keep the benchmark repurchase rate at 5.25 percent, highlighting increased uncertainty due to the West Asia conflict, which led to a sharp rise in crude prices, weakened the rupee, and disrupted trade flows.
The RBI's policy stance remained neutral.
RBI Governor Sanjay Malhotra stated that geopolitical uncertainties had increased since the last policy meeting, and the committee chose to "wait and watch."
While inflation remains within the target range, risks have increased due to volatile oil markets and the possibility of "second-round effects," which could dampen demand and delay investment recovery.
The central bank revised its growth outlook and warned that the full economic impact of the conflict, particularly on energy costs, will become clearer in the coming months, reinforcing the need to maintain current rates rather than preemptively tightening or easing monetary policy.
The RBI projected GDP growth of 6.9 percent for the current fiscal year, down from the expected 7.6 percent for the year ending March 31, 2026. Inflation is projected at 4.6 percent for 2026-27 (April 2026 to March 2027 fiscal), which falls within the RBI's 2-6 percent target range.
For the first 11 months of 2025-26, the average inflation was 1.95 percent.
The central bank also provided a forecast for core inflation, which it expects to be 4.4 percent in the current fiscal year.
The RBI's estimates compare with more than 7 percent GDP growth projected in government estimates released in February, while inflation was expected to remain close to the 4 percent target.
The central bank had reduced interest rates by a cumulative 125 basis points since February last year, including a quarter-point cut in December.
"Robust private consumption and investment demand continue to support growth. However, the West Asia conflict is likely to hinder growth," Malhotra announced.
"Higher input costs associated with rising energy prices and international freight and insurance costs, along with supply-chain disruptions that would constrain the availability of key inputs for downstream sectors, would negatively impact growth," he said.
The MPC noted that the intensity and duration of the conflict, and the resulting damage to energy and other infrastructure, pose risks to the inflation and growth outlook.
However, the fundamentals of the Indian economy are strong, providing greater resilience to withstand shocks than in the past.
"The economy is facing a supply shock. It is prudent to observe the changing circumstances and the evolving outlook for growth and inflation," he said.
Crude oil prices rose above USD 100 per barrel after the US and Israel attacked Iran on February 28, followed by Tehran's retaliatory measures. Prices fell sharply after a two-week ceasefire was announced on Wednesday.
Malhotra said that elevated crude oil prices could increase imported inflation and widen the current account deficit.
Disruptions in energy markets, fertilizers, and other commodities may also adversely impact industry, agriculture, and services, reducing domestic output.
India, which relies on the Middle East for roughly half of its crude oil and the bulk of its cooking gas, has been particularly affected by the closure of the Strait of Hormuz. This disruption choked a vital energy artery, driving up import costs and straining domestic fuel supplies.
The rupee has fallen about 7 percent over the past year, making it one of Asia's worst-performing currencies, as rising oil prices inflated the import bill and increased demand for dollars. This currency's decline has compounded imported inflation, amplifying the economic shock from the conflict.
"Elevated energy and other commodity prices, as well as shocks to the availability of inputs due to disruptions in the Strait of Hormuz, are likely to impact growth in 2026-27," he said.
On the rupee, he said, despite stronger macroeconomic fundamentals, the Indian currency depreciated more than the average in the previous years.
After the circulars restricting offshore speculative activity and the recent de-escalation on the geopolitical front, the rupee has seen some relief.
The rupee appreciated 50 paise to 92.56 against the US dollar in early trade on Wednesday.
"Let me reiterate that our exchange rate policy remains unchanged. Specifically, intervention in the foreign exchange market is aimed at smoothing excessive and disruptive volatility without targeting any specific level or band for the exchange rate," he said.
"The RBI stands committed to this policy and would 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 said that global economic conditions and sentiments have soured after the outbreak of the West Asia conflict.
"These have adversely impacted the growth-inflation outlook," he said. "As reiterated before, we shall remain vigilant of the evolving situation and put in place policies that prioritise the best interest of the economy."
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