Between easing inflation and rising geopolitical risks, RBI chooses caution

RBI holds rates amid West Asia uncertainty, with oil prices and geopolitical risks set to shape inflation, growth, and future policy moves

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in its first meeting this financial year, took a judicious call on Wednesday to keep the policy repo rate unchanged. Given the uncertainty stemming from the crisis in West Asia — though its intensity has declined considerably since the United States (US) and Iran have agreed to a ceasefire at a crucial juncture — it made sense for the MPC to wait for more clarity before adjusting the monetary policy. It is also worth noting that while there are concerns that higher commodity prices, particularly those of crude oil and gas, could push up the inflation rate over the coming months, the retail inflation rate before the war started was relatively low and provided considerable policy comfort. The consumer price index-based inflation rate for January and February was 2.7 per cent and 3.2 per cent, respectively.

 

It will now be worth watching whether the two-week ceasefire between the US and Israel, on the one hand, and Iran, on the other, holds and whether that will be enough to find a durable solution to the crisis. If the two sides fail to find a solution and the war resumes, the threshold for any further dialogue will rise substantially. To what extent movements in the Strait of Hormuz are restored, and on what conditions, need to be carefully monitored. It is believed that oil and gas facilities damaged during the war will take some time to start functioning again. Nevertheless, the ceasefire has helped bring down oil prices and pushed up those of stocks and bonds. It should also help provide much-needed stability in the currency market. The direction in financial markets will be determined by how diplomatic efforts progress over the coming days.

 

In terms of the assessment of the economy in this uncertain environment, the RBI projected a growth rate of 6.9 per cent in real gross domestic product for 2026-27. The second advanced estimates by the National Statistics Office had estimated real growth at 7.6 per cent for 2025-26. Thus, growth this financial year is expected to be comparatively slow, partly owing to external uncertainties. A private-sector forecaster has projected that the monsoon this year will be below normal, which could also affect outcomes on growth and inflation. On inflation, the RBI expects the rate to average 4.6 per cent in 2026-27, with the highest quarterly rate of 5.2 per cent during October-December. These forecasts can change significantly, depending on developments in West Asia. As the Monetary Policy Report showed, the RBI’s baseline assumption for prices of crude oil is an average of $85 per barrel for the financial year. Resumption in hostilities can push it up.

 

Assuming these inflation-growth forecasts hold, it is reasonable to argue that the policy interest rate will remain at the current level throughout the year. Interestingly, the RBI has also started giving a projection for the core inflation rate, which is expected to average 4.4 per cent during the year. The inclusion of this additional information must be welcomed. It will help reduce information asymmetry. Besides, although the RBI’s target is the headline inflation rate, using the core rate in communication could be useful in managing expectations, particularly during supply-driven shocks, which tend to make the headline rate more volatile. Along with the MPC’s decision, the RBI also announced measures to improve the ease of doing business, and one of them is worth highlighting here. It recently consolidated over 9,000 regulatory instructions into 238 master directions. A similar exercise is being carried out for supervisory instructions. Taken together, these should help improve clarity among regulated entities and reduce friction.