India’s central bank held borrowing costs steady on Wednesday as surging oil prices tied to the Iran conflict threatened to stoke inflation and cloud the case for growth-supportive rate cuts.
The Reserve Bank of India’s six-member monetary policy committee (MPC) kept the repo rate — the benchmark at which the RBI lends to commercial banks — unchanged at 5.25% and maintained a neutral stance.
Policy decision and rationale
All six MPC members voted to hold rates, in line with a Reuters poll from late March in which 69 of 71 economists forecast no change.
The panel comprises three central bank officials and three external appointees, including Governor Sanjay Malhotra.
“There has been a spike in geopolitical uncertainties globally since the MPC meeting in February, which is expected to have an impact on domestic activity, particularly in terms of growth momentum already visible through high-frequency indicators,” Malhotra said.
“While the current assessment is that headline inflation remains comfortably within the target range, risks are biased to the upside. The possibility of second-round effects from recent fuel price increases remains uncertain and needs to be carefully watched,” he added.
“Taking all these considerations into account, the MPC has decided to remain neutral for the time being.”
Growth and inflation outlook
Government estimates point to economic expansion of more than 7% in the fiscal year that began 1 April, with inflation expected to hover near the RBI’s 4% target.
A sharp rise in oil prices since the outbreak of hostilities between Iran and the US and Israel, however, threatens to weigh on growth and stoke inflationary pressures, Reuters reported.
Market reaction and expectations
Financial markets reacted positively, buoyed by easing oil prices and improved risk sentiment following the announcement of a two-week Iran-US ceasefire.
Benchmark equity indices rallied sharply, while the rupee strengthened against the US dollar after hitting record lows earlier in the conflict.
With headline inflation under control but upside risks persisting — and growth still robust yet vulnerable to external shocks — the central bank is expected to hold its fire before moving on rates, analysts said.
What to watch
Investors will closely track oil prices, domestic inflation data and consumption figures to assess how long the RBI will remain on hold.
Wednesday’s decision was broadly in line with market expectations, and the bank is likely to maintain a data-driven approach given that geopolitical uncertainty will not dissipate quickly, Reuters reported.
The RBI kept its key lending rate at 5.25% and adopted a neutral stance, reflecting the uncertainty hanging over India’s growth and inflation outlook from the Iran conflict.
Policymakers appear to be taking a wait-and-watch approach as the crisis unfolds.
This post RBI holds rates at 5.25% as Iran war clouds India’s growth outlook may be modified as updates unfold
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