One wouldn’t call the tone of the policy hawkish, but RBI Governor Sanjay Malhotra seems to be preparing the market for an extended pause before future rate hikes. At the moment, the overnight index swap (OIS) market, which reflects the future interest rate trajectory, is pricing in three rate hikes for the current year. That might be unlikely, but there could be rate hikes in future. When? Not too soon. The two-week ceasefire in the US-Israel-Iran war has changed the pitch, albeit for the time being.
The 10-year bond yield dropped to 6.90 per cent, 14 basis points lower than Tuesday’s close. The rupee closed at 92.58 a dollar, 42 paise stronger. And equities roared. Though the policy was a non-event, the ceasefire announced on Wednesday cheered the markets.
The MPC has recognised that the intensity and the duration of the West Asia conflict and its impact on the energy and other infrastructure are adding risks to both inflation and growth outlooks. At this juncture, the decision is to wait and watch the changing circumstances and the evolving growth-inflation outlook. The RBI will remain vigilant, closely monitoring incoming information and assessing the balance of risks.
The signal is clear: If the uncertainties continue and the supply-side shock intensifies, there will be a rate increase.
In his post-policy interaction with the media, Malhotra was non-committal on the rate front. “…it is quite possible that low rates will continue for a long time, as I mentioned — structurally, Indian economy is very strong, very resilient, very robust.… Structurally, long-term macroeconomic fundamentals — because of the various measures taken by the government, the RBI
and various institutions — remain very strong and continue to drive growth, while at the same time keeping price pressures contained. So, it is possible that even in the short to medium term, we will continue to have low rates.”
The governor flagged five critical concerns in his statement. While elevated crude oil prices could increase imported inflation and widen the current account deficit, disruptions in energy markets, fertilisers and other commodities could adversely impact industry, agriculture and services, reducing domestic output.
It doesn’t end there. Heightened uncertainty, increased risk aversion and safe-haven demand could impact domestic liquidity conditions, economic activity, consumption and investment, even as weaker global growth prospects might dampen external demand and reduce remittance flows.
Finally, adverse spillovers from global financial markets could tighten domestic financial conditions and raise the cost of borrowing.
The RBI, of course, reiterated its commitment to remain proactive and pre-emptive in liquidity management and ensure sufficient liquidity in the banking system to meet the productive requirements of the economy.
Higher energy and other commodity prices, coupled with supply shocks, would affect growth. Assuming the adverse impact of the West Asia conflict would not last long, the RBI projected real gross domestic product (GDP) growth for FY27 at 6.9 per cent — 6.8 per cent in the first quarter, 6.7 per cent in the second, 7 per cent in the third, and 7.2 per cent in the fourth. There is a rider, though: There may be downside risks to the domestic growth outlook if the war continues.
For the same reasons, the consumer price index (CPI)-based inflation for FY27 is projected at 4.6 per cent — 4 per cent in the first quarter, 4.4 per cent in the second, 5.2 per cent in the third, and 4.7 per cent in the fourth.
Possibly for the first time, the RBI has given an estimate of non-food, non-energy inflation (core inflation) at 4.4 per cent. Excluding precious metals, it’s even lower, indicating that underlying inflation pressures are expected to remain contained. Still, there is a caveat here too — the risks are on the upside.
Incidentally, the 4.6 per cent inflation estimate is based on the assumption of crude price at $85 a barrel. The Monetary Policy Report – April 2026, released simultaneously along with the policy statement, projects average inflation higher at 5 per cent in FY27 and 5.1 per cent next year, assuming crude price at $90 a barrel.
Going beyond theories and assumptions, a close reading of the policy tells us all about the uncertain times:
* The word “uncertainty” has been used in the governor’s statement seven times — four times referring to geopolitics, and twice following the adjective “heightened”.
* “Deficit” has been used five times — thrice in reference to “current account” and twice to “trade”.
* “Geopolitics” has appeared four times.
* The word “risk” has been used 13 times (once, in a different context, though — referring to banks’ capital to risk-weighted assets ratio). Thrice it is preceded by the adjective “upside” and twice “downside”.
* “Disruption” appears six times — thrice referring to “supply chain”.
* The word “pressure” has been used five times and “volatility” thrice, preceded by adjectives such as “heightened” and “disruptive”.
* “Heightened” appears five times in the statement, “disruption” six times and “disruptive” twice. Of course, the statement has balanced these by using the word “resilience” thrice, and “strong” eight times — referring to momentum of economic activities, macroeconomic fundamentals, credit growth and FDI pipeline, among others. The language of the policy clearly communicates what the RBI is seeing and how it is preparing itself for uncertain times.
The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in. X: @TamalBandyo
 "Reserve Bank of India, RBI")