The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Wednesday decided to adopt a “wait and watch” approach on a day when the war in West Asia saw a temporary pause and voted unanimously to keep the policy repo rate unchanged at 5.25 per cent, while maintaining its neutral stance, retaining the flexibility to “respond judiciously to incoming information”.
“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 monetary policy committee voted to keep the policy rate unchanged even as it remains vigilant, closely monitoring incoming information and assessing the balance of risks,” RBI governor Sanjay Malhotra said while explaining the rationale of the decision.
The governor clarified that the MPC has taken the ceasefire into account in the monetary policy decision.
“At 5:30 am, we got some pleasant news, maybe not a complete surprise,” Malhotra told reporters at the post-policy-review interaction in Mumbai.
“The whole implications (will come later), but the ceasefire has been taken into account in the monetary policy decision,” he added.
Impact pointers
The RBI governor, however, listed five ways in which the conflict in West Asia has the potential to impact the Indian economy — imported inflation from elevated oil prices, disruptions in energy market impacting domestic output, increased risk aversion impacting domestic liquidity, consumption and investment, weak global growth affecting external demand and remittances and adverse spillovers from global financial markets tightening domestic financial conditions and raising the cost of borrowing.
Growth and inflation
The RBI has lowered its growth projections for the first two quarters of FY27 to 6.8 and 6.7 per cent, respectively, from 6.9 per cent and 7 per cent earlier and increased the inflation projections for the Q2FY27 to 4.4 per cent, while retaining its earlier projections for Q1FY27 at 4 per cent as elevated energy prices and supply side concerns due to disruptions in the Strait of Hormuz weigh down on the economy.
For the full financial year 2026-27, the central bank has projected a real GDP growth of 6.9 per cent and CPI inflation of 4.6 per cent.
The central bank has assumed crude oil prices to average at $85 per barrel for FY27 for its baseline growth projections.
Rates to remain low
The RBI governor on Wednesday reiterated his earlier view that interest rates may remain low for a long time, and economists echoed a similar view.
“We estimate inflation at 4.9 per cent for FY27 and growth at 6.8-7 per cent, assuming the current conflict is short-lived and the current ceasefire holds. The policy rate could remain unchanged through FY27 under this scenario. The rupee could find some stability over the coming days, along with some cooling off in the 10-year bond yield, with a 6.8-7 per cent range likely to emerge,” said Sakshi Gupta, principal economist, HDFC Bank.
“It would be premature to draw firm conclusions on the impact or pre-empt the outcome of the West Asia conflict. At this juncture, all that is required is keeping ready adequate policy buffers and staying nimble to act as the situation evolves,” said Dipti Deshpande, principal economist, Crisil.