RBI To Hold Rates As Inflation Risks Rises

Mumbai: Heightened uncertainty transmitting from the West Asia crisis into India's growth and inflation outlook may compel the Monetary Policy Committee (MPC) of the Reserve Bank of India to hold the benchmark repo rate to 5.25 per cent next week and maintain a neutral stance. The three day policy meeting of the MPC (RBI’s rate setting panel) will begin on April 6. Experts also do not expect the central bank to announce any measures for either liquidity or currency management as the central bank has been taking steps outside the policy recently.

Madan Sabnavis, Chief Economist, Bank of Baroda, said, “We do not expect any change in repo rate or stance this time. The tone will be cautious and what will be eagerly awaited is RBI's forecast of GDP and inflation under the prevailing uncertainty. We do not expect any measures for either liquidity or currency management as RBI will do whenever required as we have seen of late.”

While India’s growth momentum remains steady, inflation risks and external uncertainties particularly from the Iran conflict may limit further rate cuts, with the possibility of a prolonged pause in the rate cycle, said experts.

Globally, a lot has changed since the RBI announced its last policy in February 2026. With the outbreak of the United States-Israel war with Iran, energy infrastructure of major oil exporting economies has been damaged. The Gulf produces ~1/3rd of the world’s crude and the Strait of Hormuz is the second biggest choke point for the fuel in the world. As a result Brent crude prices which were below USD 70/bbl just a month back have touched almost USD 120/bbl briefly, since the war began on February 27, 2026 with global central banks preparing for its impact on inflation and growth. India’s 10 year G-Sec yield has gone up by 38 basis points breaching the 7 per cent mark while the rupee has fallen 4.22 per cent breaching past 95 per dollar as foreign investors dumped stocks worth $ 13.6 billion in March alone.

If the ongoing Middle East conflict continues, India’s real GDP growth is projected to slow by around one percentage point and retail inflation may rise by nearly 1.5 percentage points for FY27 according to E& Y report. The current account deficit is also likely to widen significantly in FY27. India’s economy grew at the rate of 7.8 per cent in the October to December quarter of the financial year 2025-26 while Consumer Price Inflation came in at 3.2 per cent for February.

India remains particularly vulnerable due to its heavy dependence on energy imports. The country imports nearly 90 per cent of its crude oil needs and relies significantly on natural gas and fertilisers from abroad. As a result, shocks to global energy markets tend to ripple across the economy through strong linkages with production and consumption.

Vinay Pai, managing director and head of fixed income at Equirus Group, said, “The RBI is expected to actively manage liquidity conditions through instruments such as Variable Rate Repo (VRR) and Variable Rate Reverse Repo (VRRR) operations, with the objective of maintaining liquidity in a broadly neutral zone, as opposed to a sustained deficit.”

On the borrowing front, the RBI has already taken steps to rebalance the government’s borrowing profile, including a reduction in the H1 borrowing share and a lower allocation toward long-duration securities, aimed at easing pressure on the long end of the yield curve. It has also been taking steps to manage speculative bets against the domestic currency. The RBI late on Wednesday barred banks from offering rupee non-deliverable forwards to resident and non-resident clients and said companies cannot re-book cancelled forwards. The move followed tighter limits on banks' forex positions in the ‌domestic market to $ 100 million by the end of each business day. The banks have to comply with this directive by April 10, 2026.

“Going ahead, the RBI is likely to closely monitor government actions, particularly around fertiliser supply, which could have implications for the kharif crop cycle. Any disruption here may lead to an uptick in food inflation, a key factor that could tilt the policy stance toward a more hawkish tone in June policy,” added Pai.

Says Ashutosh Khajuria, former executive director of Federal Bank, “With inflation risks rising due to surging oil prices, the RBI’s dilemma would be to raise rates to curb inflation or maintain status quo to support growth. The RBI will hold rates and say that it is closely watching the evolving situation. Also I do not expect it to announce any measures to lift the rupee as it has been taking measures outside the policy framework.”