War and weather force RBI into a wait-and-watch mode as risks to growth, inflation loom

Mumbai: Faced with uncertainties over the duration of the West Asia war and forecasts of a sub-par monsoon, the Reserve Bank of India's monetary policy committee (MPC) on Friday decided to wait for more clarity before taking a call on interest rates.

The six-member rate-setting panel kept the key repo rate unchanged at 5.25%, while acknowledging there were considerable risks to its assessments of inflation and growth. These emanate from the inability to predict how long the US-Iran conflict will last and how intense it will be; the magnitude of its spillover effects, and how quickly can the disrupted supply chains be restored.

There are also fresh worries over the crucial southwest monsoon. The India Meteorological Department (IMD) last week downgraded its seasonal rainfall forecast to 90% of the long period average, from 92% predicted in April, clouding the farm produce outlook as well.

Governor Sanjay Malhotra said though risks of higher inflation have amplified, the MPC found it prudent to wait for greater clarity to emerge.

“The MPC will continue to remain data-dependent and closely monitor the developments, including supply-side pressures getting embedded in the general price level and inflation expectations,” the panel said in a statement

Citing the uncertainties, the committee downgraded India's growth outlook, while raising the inflation projections. The central bank now expects the economy to grow 6.6% in the fiscal year 2027, as against its earlier projection of 6.9%. It cautioned that prolonged supply chain disruptions, heightened volatility in the global financial markets and weather-related shocks will pose downside risks to the outlook.

The panel also expects inching up of retail inflation, which rose to 3.4% in March and 3.5% in April on the back of higher food prices even as fuel inflation remained modest. With retail fuel prices now being hiked and reflecting on the broader economy, inflation—as measured by the consumer price index—is now forecast at 5.1% in FY27, raised from 4.6% estimated earlier.

A delay in release of the full year growth estimates by the statistics office meant that the MPC has had to rely on the second advance estimates of 7.6% growth for FY26, which was released in February. Hours after the committee's announcement, the government announced that the Indian economy grew 7.7% in FY26.

RBI has cut the repo rate by a cumulative 125 basis points (bps) since the start of the calendar in January.

Economists see the twin problems of falling growth and rising inflation as a policy challenge.

“RBI, with its pause today has bought itself more time to understand the growth-inflation dynamics, and it probably did not want to immediately react with a rate hike to match its higher inflation forecasts,” said Indranil Pan, chief economist at Yes Bank

Pan said the policy options remain open, as RBI assesses the risks to the inflation trajectory alongside the second-round impact via inflation expectation surveys, before deciding on rate hikes.

“Today's policy tone was truly neutral,” economists at Barclays said in a note. “The MPC is data dependent and will approach each policy as it comes. In our view, the actual inflation outcomes have to be within RBI's estimate to give it the comfort that inflation pressures are not generalizing.”

At the press conference, Malhotra reiterated that uncertainty prevails on certain fronts, with the major concern being how long would the supply disruptions continue, and what impact would they have on prices. As of now, while availability is not so much of a concern, it is the price that needs to be watched, he said.

The governor also said that the domestic economy remains resilient despite the external shocks. “…global economic conditions and sentiments continued to be frayed without any meaningful resolution of the West Asia conflict. While these have adversely impacted the domestic growth-inflation outlook, the economy at this point is relatively strong,” Malhotra said.

With inflation expected to inch closer to RBI’s upper tolerance level, many are now expecting its rate cut hike cycle to start in October.

According to the MPC, inflation is expected to reach 5.9% in the December quarter of FY27, before softening to 5.4% in the next three months. Under India’s flexible inflation targeting framework, RBI has to keep inflation at 4% with a 2% tolerance band.

Sakshi Gupta, principal economist at HDFC Bank, said the policy could be assessed as slightly hawkish given the 50-bps upward revision in the inflation forecast to 5.1% for FY27. This, she said, raises the likelihood of the rate hike cycle beginning by the October policy, adding that she expects a cumulative 50 bps rate increase in FY27.