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.
Key Takeaways
The Reserve Bank of India kept its key policy rate unchanged at 5.25% amid concerns over lower growth and higher inflation due to the Middle East crisis. The central bank warned that disruptions in oil supplies could impact economic momentum.
- RBI maintains repo rate at 5.25%
- Middle East crisis raises inflation risks and lowers growth forecasts
- Indian rupee hits record low amid foreign investor pullout
- GDP growth expected to fall to 6.9% in 2026-27 from 7.6%
- Average inflation forecast at 4.6% for the current financial year
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.
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