RBI maintains repo rate at 5.25% as West Asia tensions cloud growth
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Mumbai: The Reserve Bank of India (RBI) on Wednesday kept its key policy rate unchanged at 5.25 per cent, adopting a cautious wait-and-watch approach as it assesses the potential fallout of the six-week-long conflict in Iran on energy supplies, inflation, and economic growth.
The central bank’s six-member Monetary Policy Committee (MPC) voted unanimously to retain the benchmark repurchase rate, citing heightened uncertainty after the West Asia conflict drove crude oil prices sharply higher, weakened the rupee, and disrupted trade flows. The RBI also maintained its policy stance at neutral.
Noting the rise in geopolitical risks since the last policy review, RBI Governor Sanjay Malhotra said the MPC chose to “wait and watch” before taking any policy action. While inflation remains within the target band, he highlighted risks from volatile oil markets and potential second-round effects that could dampen demand and delay the recovery in investment.
The central bank revised its growth forecast downward, projecting GDP expansion of 6.9 per cent in the current financial year, down from the previously expected 7.6 per cent for 2025-26. Inflation is projected at 4.6 per cent for 2026-27, comfortably within the RBI’s 2–6 per cent target range. For the first 11 months of 2025-26, average inflation stood at 1.95 per cent.
For the first time, the RBI also provided a forecast for core inflation, projecting it at 4.4 per cent in the current financial year. These estimates are slightly more cautious than government projections released in February, which had pegged GDP growth above 7 per cent and inflation close to 4 per cent.
The RBI has cut interest rates by a total of 125 basis points since February last year, including a 25-basis-point reduction in December, to support growth.
“Growth impulses continue to be supported by robust private consumption and investment demand. However, the West Asia conflict is likely to impede growth,” Malhotra said. He warned that higher input costs arising from increased energy prices, international freight and insurance charges, and supply-chain disruptions could constrain key sectors and slow economic recovery.
The MPC highlighted that the duration and intensity of the conflict, along with damage to energy and infrastructure, add uncertainty to both inflation and growth projections. Nevertheless, Malhotra emphasised that the Indian economy’s strong fundamentals provide resilience to withstand such shocks better than in the past.
“The economy is confronted with a supply shock. It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook,” he said.
Crude oil prices surged above USD 100 per barrel following attacks by the US and Israel on Iran on February 28, which were followed by Tehran’s retaliatory strikes. Prices fell sharply after a two-week ceasefire was announced early Wednesday. Malhotra noted that elevated crude prices could fuel imported inflation and widen the current account deficit.
Disruptions in energy, fertilisers, and other commodities may also affect industry, agriculture, and services, reducing domestic output. India, which relies on the Middle East for nearly half of its crude oil and most of its cooking gas, has been significantly impacted by the effective closure of the Strait of Hormuz, a key energy corridor.
The rupee has depreciated roughly 7 per cent over the past year, making it one of Asia’s worst-performing currencies, driven by higher oil import costs and increased dollar demand. Malhotra noted that recent regulatory measures to curb offshore speculative activity, coupled with a partial de-escalation of tensions, provided some relief. The rupee opened on Wednesday at 92.56 per US dollar, up 50 paise.
On currency policy, the governor reiterated that RBI interventions aim solely at smoothing excessive and disruptive volatility, without targeting any specific level or band. “The RBI remains committed to judiciously managing volatility to prevent self-fulfilling expectations from amplifying currency movements beyond what fundamentals warrant,” he said.
Malhotra further noted that global economic conditions and market sentiments have soured following the outbreak of the West Asia conflict, adversely impacting the growth-inflation outlook. “We shall remain vigilant to the evolving situation and implement policies that prioritise the best interest of the economy,” he concluded.
With PTI inputs