Navigating Uncertainty: Global Conflict and Inflation Drive RBI's Monetary Policy Outlook

The Reserve Bank of India (RBI) monetary policy committee (MPC) is anticipated to maintain steady interest rates at 5.25 percent during the April review. However, the key focus is shifting toward understanding the inflationary impacts stemming from the conflict in West Asia, according to a Moneycontrol poll that surveyed economists, FX strategists, and heads of treasuries.

Global Energy Shock Fuels Inflationary Concerns​

The war in West Asia has created significant economic instability, prominently demonstrated by Brent crude prices staying elevated above $100 per barrel. This volatility is exacerbated by the potential indefinite closure of the Strait of Hormuz, a critical shipping route through which India imports at least 40 percent of its energy needs.

These external pressures have severely impacted the rupee, which has fallen nearly 3 percent since the start of the year, making FY26 a difficult period for the currency. While recent measures by the RBI offered temporary relief, economists observe that the ultimate path for the rupee and interest rates will be determined by broader global macro factors.

Rate Trajectory: Expectations vs. Reality​

While the RBI is expected to keep rates unchanged in the upcoming policy, market anticipation is focused on potential rate adjustments. Central banks in Australia and Japan, among others, have recently increased their interest rates to combat inflation.

Previously, the RBI had slashed interest rates by a cumulative 125 basis points since February 2025, with the last cut occurring in December 2025. Market participants had expected a prolonged pause.

However, experts noted that market sentiment is increasingly suggesting a shift. Some economists forecast a potential rate hike by the end of the fiscal year, provided Brent crude prices remain consistently elevated at $100 per barrel throughout. Furthermore, researchers from Bank of Baroda cautioned, stating that "If oil prices remain above US$100/bbl for a consistently long period of time and inflation breaches the upper tolerance band of RBI (6 percent), then there might be a chance of rate hike by the central bank towards the end of FY27."

Despite this, the market appears to be pricing in a rate hike as early as June, given the movement in India government securities bond yields. Consequently, the RBI Governor's commentary and the minutes released after the April 8 meeting are anticipated to be crucial guides for the market.

Inflation Forecasts and Liquidity Measures​

The RBI is expected to release its full-year inflation forecast during the upcoming monetary policy review. Earlier, the central bank projected inflation for the first two quarters of FY27 at 4 percent and 4.2 percent respectively, due to a higher base effect.

While February's CPI ticked up to 3.2 percent from 2.7 percent in January, this print did not reflect the West Asia conflict. Since the war broke out, Brent crude prices have spiked past $100 per barrel. This poses a serious risk, especially since India imports nearly 80 percent of its energy needs.

Based on these heightened energy risks, economists revised their projections. Radhika Rao, Senior Economist and Executive Director at DBS Bank, highlighted that price increases in commercial liquified petroleum gas (LPG) and premium petroleum carry an additional 10 to 20 basis points upside risk to inflation. As a result, economists now project India’s CPI for FY27 to average between 4.5 percent and 4.7 percent, a significant deviation from the RBI's earlier 2.1 percent forecast for FY26.

To manage liquidity, the central bank has implemented various operations, including Open Market Operations (OMO) purchases and Variable Rate Repo (VRR). While continuous forex interventions led to a decline in dollar reserves, the RBI reported holding approximately $688 billion in its reserves as of March 27. Analyzing the situation, economists from Barclays stated they "expect the RBI to continue to inject abundant liquidity into the system, ensuring easy financial conditions to tide the economy over through the shock."

Growth Outlook​

Most economists anticipate that growth in FY27 will moderate compared to FY26, acknowledging the economic impact of the West Asia conflict.

While the RBI projected real GDP for Q1 FY27 and Q2 FY27 at 6.9 percent and 7 percent respectively, the full-year number remains to be announced. Experts warn that "downside risks to India's growth outlook persist, given the possibility of a prolonged war situation and higher energy prices. Looking ahead, the overall duration of the conflict and the extent of its repercussions on the global supply chains are critical," noted economists from CareEdge Ratings.

Forecasting services provided varied estimates: Barclays economists expect FY27 growth to be 6.8 percent, a sharp decline from an estimated 7.6 percent in FY26. Conversely, Bank of Baroda economists project a slightly more optimistic growth range, projecting between 7 percent and 7.2 percent.