India’s Central Bank Holds Rates as Iran War Raises Inflation Risks

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The Reserve Bank of India unanimously held its benchmark repo rate at 5.25%, as the Iran war clouds the inflation and growth outlook.
The six-member Monetary Policy Committee also maintained a “neutral” stance, preserving flexibility to respond to evolving geopolitical conditions.
Governor Sanjay Malhotra said upside risks to inflation have risen and the war could impact India’s growth momentum.
The US and Iran agreed to a ceasefire earlier in the day, with Tehran saying safe passage of ships is “possible” for the next two weeks.

The Reserve Bank of India kept its key policy rate unchanged on Wednesday, as the Middle East conflict pushes up oil prices and complicates the central bank’s balancing act between supporting growth and containing inflation.

The six-member Monetary Policy Committee voted unanimously to hold the repo rate at 5.25%, the central bank announced following its first policy meeting since the Iran war escalated in late February. The panel also decided to continue with its “neutral” stance, retaining the flexibility to respond to evolving conditions.

The decision was widely expected. Sixty-nine of 71 economists in a late-March Reuters poll had forecast no change to the benchmark rate.

Since the RBI’s last policy meeting, the geopolitical landscape has been upended. The war between Iran and a combined US-Israeli force has effectively closed the Strait of Hormuz, through which about a fifth of global oil supply normally passes. Brent crude has surged above $100 a barrel, and India which relies on the Middle East for roughly half its crude and most of its cooking gas has been hit hard.

Governor Sanjay Malhotra, announcing the decision, acknowledged the deteriorating outlook. “Since the last policy meeting, geopolitical uncertainties have risen,” he said. “While inflation remains in check, upside risks have risen and the possibility of second round effects renders the outlook uncertain.”

The monetary policy committee thinks the intensity and the duration of the conflict, along with the resulting damage to the energy and other infrastructure, pose a “risk to the [India’s] inflation and growth,” Malhotra said in his statement.

High frequency indicators suggest growth momentum remains robust but the war in the Middle East is likely to impact this momentum, the governor added.

India’s economy was forecast to grow by more than 7% in the fiscal year that began on April 1, according to government estimates, while inflation was expected to remain close to the central bank’s target of 4%. But a sharp rise in oil prices since the outbreak of conflict is expected to bring down growth sharply and spur inflationary pressures.

India’s Chief Economic Advisor V. Anantha Nageswaran last month warned that the growth forecast of 7.0%â€“7.4% for the financial year ending March 2027 faces “considerable downside” risk due to rising energy costs and supply-chain disruptions linked to the war. Nageswaran said the conflict would disrupt supplies of key commodities such as oil, gas, and fertilizers, push up import prices, and raise logistics costs.

The concerns have been reflected in the financial markets, with equities and bond benchmarks declining and the rupee hitting a record low since the war began at the end of February. India’s consumer inflation rose for a fourth straight month to 3.21% in February, up from 2.75% in the prior month. Malhotra said the country’s food price outlook remained “comfortable in the near term,” while adding that the jump in energy prices due to the conflict poses a risk to inflation.

In a temporary relief, the US and Iran agreed to a ceasefire earlier in the day, with Tehran saying that safe passage of ships was “possible” for the next two weeks in coordination with the country’s armed forces.

Signaling growth worries, HSBC flash Purchasing Managers’ Index compiled by S&P Global showed that India’s private sector activity in March slowed to its lowest level since October 2022. Companies surveyed indicated that the Middle East war, unstable market conditions, and inflationary pressures had “dampened growth.”