RBI Holds Rates Amid Middle East Crisis

The Reserve Bank of India (RBI) kept its key policy rate unchanged at 5.25% on Wednesday, citing concerns over lower growth and higher inflation due to the ongoing Middle East crisis. The central bank warned that disruptions in oil supplies could impact economic momentum, reversing a previously stable 'Goldilocks' phase for the South Asian economy.

According to Reuters, RBI Governor Sanjay Malhotra stated that it is prudent to wait and watch the evolving growth-inflation outlook. The decision was unanimous, with all six members of the monetary policy committee voting to hold rates. The RBI also decided to continue its 'neutral' stance.

The Middle East crisis has pushed oil prices sharply higher and disrupted gas supplies worldwide. India, which imports 90% of its oil, is particularly vulnerable. Reflecting this nervousness, the Indian rupee fell to a record low as foreign investors pulled nearly $19 billion between March and April.

The RBI's economic forecasts for the current financial year predict GDP growth will fall to 6.9% in 2026-27 from an expected 7.6% in the year ended March 31, 2026. Average inflation is seen at 4.6%, within the central bank's target band of 2-6%. The RBI also offered a forecast for core inflation, which it sees at 4.4% this financial year.

According to CNBC, economists and analysts expect the RBI to keep rates unchanged while emphasizing readiness to support the weakening rupee and inject liquidity to keep bond yields contained. The selloff in Indian government bonds accelerated, with the 10-year benchmark yield rising over just two trading sessions by as much as it had in the entire previous week.

The RBI's measures come amid worries over a deepening conflict in the Middle East keeping oil prices elevated and prompting foreign investors to yank money from Indian assets at a record pace. The central bank has taken steps to curb arbitrage and speculative trades that bet against the rupee, which rallied nearly 2% week-on-week to 93.10, its best weekly performance since November 2022.

According to Reuters, BofA Global Research sees a compelling buying opportunity in India's battered bank stocks, with valuations for some large private lenders near their cheapest levels. The Nifty Bank index has fallen 8% since the start of the Iran war at the end of February, underperforming the benchmark Nifty 50, which is down 4.7% over the same period.

Amish Shah, head of India research at BofA Global Research, told Reuters that some large private banks trade 1.5 to 2.5 standard deviations below their historical average valuations. He expects a rate hike by the RBI later this financial year, which would further support banks by improving margins and strengthening their overall earnings outlook.

On the contrary, Shah expects information technology stocks to continue underperforming this year despite the ongoing rally driven by rupee depreciation. The artificial intelligence disruption story is real and could slow IT growth in the short run as clients reassess spending and the impact of automation on outsourcing demand. Over the medium to long term, broader AI adoption across enterprises could create a new growth runway for the sector.