RBI To Hold Rates As Inflation Risks Rises

Mumbai: Increasing uncertainty reflected in India’s growth and inflation outlook from the West Asian crisis may force the Reserve Bank of India’s Monetary Policy Committee (PPC) to keep the benchmark repo rate at 5.25 percent next week and maintain a neutral stance.

The three-day policy meeting of the MPC (RBI’s rate-setting panel) will begin on April 6. Experts also do not expect the central bank to announce any measures regarding liquidity or foreign exchange management, as the central bank has taken steps other than policy recently.

Bank of Baroda Chief Economist Madan Sabnavis said, “We do not expect any change in the repo rate or stance this time. The tone will be cautious and the RBI’s GDP and inflation forecast under the current uncertainty will be eagerly awaited. We do not expect any measures on liquidity or foreign exchange management as the RBI will do when necessary as we have seen in recent times.”

While India’s growth momentum remains stable, inflation risks and external uncertainties, especially arising from the Iran conflict, may limit further interest rate cuts and there is a possibility of a prolonged pause in the interest cycle, experts said. A lot has changed globally since the RBI announced its last policy in February 2026. With the outbreak of the US-Israeli war with Iran, the energy infrastructure of major oil exporting economies was damaged. The Gulf produces about 1/3 of the world’s crude oil, and the Strait of Hormuz is the second largest choke point for fuel in the world.

As a result, since the start of the war on February 27, 2026, when global central banks began to prepare for the war’s impact on inflation and growth, Brent crude oil prices briefly touched almost US$120/barrel, having been below US$70/barrel just a month earlier. India’s 10-year G-Sec yield rose 38 basis points to cross the 7 percent mark, while the rupee fell 4.22 percent to cross 95 per dollar as foreign investors sold stocks worth $13.6 billion in March alone.

If the ongoing conflict in the Middle East continues, India’s real GDP growth is expected to slow by around one percentage point and retail inflation is expected to rise by around 1.5 percentage points for FY27, according to the E&Y report. The current account deficit is also expected to increase significantly in FY27. While the Indian economy grew at 7.8 percent in the October-December quarter of the fiscal year 2025-26, Consumer Price Inflation stood at 3.2 percent in February.

India is particularly vulnerable due to its heavy dependence on energy imports. The country imports almost 90 percent of its crude oil needs and relies heavily on natural gas and fertilizer from abroad. As a result, shocks to global energy markets tend to propagate throughout the economy through strong linkages between production and consumption.

Vinay Pai, managing director and head of fixed income at Equirus Group, said: “RBI is expected to actively manage liquidity conditions through instruments such as Floating Rate Repo (VRR) and Floating Rate Reverse Repo (VRRR) operations with the aim of keeping liquidity in a broadly neutral zone as opposed to a persistent deficit.”

On the borrowing front, the RBI has already taken steps to rebalance the government’s borrowing profile, including reducing the share of H1 borrowing and lower allocation to long-term securities, aimed at easing pressure on the long end of the yield curve. It is also taking steps to manage speculative bets against the local currency. The RBI late on Wednesday banned banks from offering non-deliverable futures in rupees to resident and non-resident customers and said companies cannot re-book canceled futures. This move comes after the limits on banks’ forex positions in the domestic market were tightened by up to $100 million at the end of each business day. Banks must comply with this directive by April 10, 2026.

“Going forward, the RBI is likely to closely monitor the government’s actions, especially regarding fertilizer supply, which could have implications for the kharif crop cycle. Any disruption here could lead to a rise in food inflation, a key factor that could tip its policy stance towards a more hawkish tone in its June policy,” Pai said.

Ashutosh Khajuria, former managing director of the Federal Bank, says: “As inflation risks increase due to rising oil prices, the RBI’s dilemma will be to raise rates to curb inflation or maintain the status quo to support growth. The RBI will hold rates and say it is closely monitoring the evolving situation. I also do not expect it to announce any measures to lift the rupee as it is taking measures outside the policy framework.”