RBI shuns hawkish signal, keeps rates unchanged amid war shock

India’s rate-setting panel kept the policy rate unchanged and Reserve Bank of India governor Sanjay Malhotra indicated that benchmark rates could remain low for an extended period despite the global uncertainty triggered by the West Asia war.

“We are in a neutral state. Possibility, either way, cannot be ruled out… it is quite possible that even in the short to medium term, we will continue to have low rates,” Malhotra said during the monetary policy announcement on Wednesday.

RBI’s Monetary Policy Committee (MPC) held the repo rate steady at 5.25% and retained the neutral stance, in line with expectations. A Mint poll of 10 economists and market participants expected the MPC to hold rates while signalling a more cautious policy stance.

Despite rising oil prices and ongoing rupee depreciation pressures, it was notable that signals pointing to a hawkish bias and an imminent rate hike were largely missing, Alexandra Hermann Prasad, lead economist at Oxford Economics, said in a note.

After the policy announcement, the yield on the 10-year benchmark government bond fell by 15 basis points to end at 6.89%. The Indian rupee, which has been reeling under pressure from persistent foreign portfolio investor outflows and high oil prices, also appreciated and ended at 92.58 to a dollar on Wednesday against 93.10 in the previous session.

In 2025, the RBI cumulatively cut the repo rate—at which it lends short-term funds to banks—by 125 basis points (bps), with the last cut of 25 bps in December to 5.25%.

The RBI pegged FY26 growth at 7.6% under the new series, higher than the 7.4% estimated in the February policy. However, real GDP growth for FY27 is projected at 6.9% because disruptions in the Strait of Hormuz and elevated energy prices are likely to impact growth.

For Q1, the central bank has projected growth at 6.8%, Q2 at 6.7%, Q3 at 7.0%, and Q4 at 7.2%, with risks to the baseline projections tilted to the downside. For its projections, RBI has assumed crude at an average of $85 per barrel in FY27.

Malhotra dismissed comments on FY27 growth projections being too optimistic. “No, we don't think that it is too optimistic. However, we have mentioned that there are more risks to the downside rather than to upside, and that will happen primarily, I would say…[if] there is a prolonged disruption in the supplies which we hope to normalize sooner than later,” he said.

While the RBI reiterated the resilience of India’s macroeconomic fundamentals, it acknowledged that the external shock has clouded the growth outlook. But Malhotra said that India is better placed today than in previous episodes of crises and many other economies.

“Despite such a big shock, we are looking at 6.9% real GDP growth. So structurally, India in the long term, with macroeconomic fundamentals and because of various measures taken, remains quite strong,” Malhotra said.

The central bank said that headline inflation remains contained and below the target. “However, upside risks to the inflation outlook driven by increased energy prices, pressures, and probable weather disturbances affecting food prices have increased.”

For FY27, RBI has projected inflation at 4.6%, with Q1 at 4.0%, Q2 at 4.4%, Q3 at 5.2% and Q4 at 4.7%. For the first time, RBI also projected core inflation at 4.4% for FY27. Core inflation strips out the impact of the rise in food and energy prices.

“The RBI revised growth estimates lower (with downside risks) and inflation higher (with upside risks), but on balance the guidance seemed neutral to dovish, in our view, due to RBI’s continuation with proactive and pre-emptive liquidity management and mention of core inflation excluding precious metals being materially lower than headline CPI estimates,” Kaushik Das, chief economist-India, Malaysia, and South Asia at Deutsche Bank AG, said in a note.

Deputy governor Poonam Gupta highlighted the resilience of remittance flows. “Our remittances come from a rather diverse set of regions… we are not anticipating a dent,” she said, adding that demand for Indian migrant workers could, in fact, rise and support inflows further.

The US is now the largest source of inward remittances, accounting for 27.7% of such flows into India as of FY24, according to the latest RBI data. The UAE, which was the largest source in FY17, is now the second largest, while nations like Saudi Arabia and Kuwait slipped further down.

Malhotra also allayed concerns on capital flows and repatriation pressures, saying that earlier outflows driven by high equity valuations are unlikely to persist. “The equity valuations have now been corrected. I don’t see any repatriation to that extent,” he said.

India’s external buffers remain comfortable, with the governor asserting that foreign exchange reserves, equivalent to about 11 months of import cover, are not a matter of concern at all. Malhotra said that improving trade agreements, robust foreign direct investment (FDI) growth, and moderation in outflows should keep both the current and capital accounts manageable.

Preserving policy flexibility at this stage allows the central bank to assess evolving global and domestic risks while consolidating the gains from earlier easing measures, said K Balasubramanian, India CEO & banking head and Indian subcontinent subcluster head at Citi.