RBI holds repo rate at 5.25% amid Iran war, flags inflation risks and keeps stance neutral

The Reserve Bank of India on Wednesday kept its key policy rate unchanged, opting for caution as the fallout from the Iran war continues to cloud the economic outlook for India.

The six-member Monetary Policy Committee (MPC) unanimously voted to hold the benchmark repo rate at 5.25 per cent, while retaining its “neutral” stance, signalling flexibility as it navigates rising global uncertainties.

Governor Sanjay Malhotra said the decision followed a detailed assessment of evolving macroeconomic and financial conditions, even as geopolitical tensions in West Asia have intensified risks to both inflation and growth.

“Since the last policy meeting, geopolitical uncertainties have risen. While inflation remains in check, upside risks have increased, and the possibility of second-round effects renders the outlook uncertain,” Malhotra said.

The decision was widely anticipated, with the vast majority of economists expecting the central bank to extend its pause amid volatile global conditions and limited policy room.

War-driven uncertainty shapes policy stance

The policy comes at a time when the Iran conflict has disrupted global energy markets and supply chains, pushing crude oil prices sharply higher in recent weeks before a partial correction following a temporary ceasefire announcement.

For India, the world’s third-largest oil importer, sustained elevated crude prices pose a direct threat to inflation, the current account deficit, and overall macroeconomic stability.

Malhotra отметил that while India’s macroeconomic fundamentals remain strong — supported by robust private consumption and investment demand — the intensification of the conflict in March has worsened external conditions.

“High-frequency indicators suggest that growth momentum remains resilient, but the ongoing conflict is likely to weigh on the outlook,” he said.

Growth resilient, but risks rising

India’s economy is projected to grow above 7 per cent in the current fiscal year, while inflation is expected to remain close to the RBI’s medium-term target of 4 per cent.

However, the sharp surge in oil prices since the outbreak of hostilities between Iran, the United States, and Israel is expected to dampen growth prospects while fuelling inflationary pressures.

The RBI also warned that the intensity and duration of the conflict, along with potential disruptions to energy infrastructure, could further complicate the outlook.

Markets reflect rising stress

Financial markets have already reacted to the uncertainty. Benchmark equity indices have seen sharp corrections in recent weeks, while bond yields have hardened and the rupee has weakened to record lows amid persistent foreign outflows.

Safe-haven flows into the US dollar have added further pressure on emerging market currencies, including the rupee.

While a recent ceasefire announcement has triggered a relief rally in global markets and a sharp drop in oil prices, policymakers remain cautious about the durability of the truce.

RBI retains flexibility amid evolving risks

By maintaining a neutral stance, the RBI has kept its options open, signalling that future policy moves will depend on incoming data and the trajectory of global developments.

The central bank’s focus now shifts to managing liquidity conditions, anchoring inflation expectations, and ensuring financial stability in an increasingly uncertain environment.

With geopolitical risks still elevated and oil price volatility far from settled, the RBI’s cautious pause underscores the delicate balancing act between supporting growth and containing inflation.