The Reserve Bank of India’s Monetary Policy Committee has kept the main policy instrument, Repo rate, unchanged at 5.25%, underscoring a cautious and calculated approach as economic risks resulting from the West Asia conflict have darkened both global and domestic outlooks.
Even as a two-week ceasefire came into effect in West Asia, a sharp rise in crude oil prices, combined with the deepening conflict, had unleashed fresh pressures, pushing up input costs, straining supply chains and causing raw material shortages across industries. In response, the central bank has turned more cautious, lowering its growth forecast to 6.9% for FY2027 from 7.6 % revised growth projected for FY2026 while making an inflation projection of 4.6% for FY2027. “Upside risks to inflation outlook have increased,” RBI Governor Sanjay Malhotra said while unveiling the policy.
Lending, deposit rates to remain unchanged
Keeping the policy rate unchanged at 5.25% would come as a significant relief for borrowers across various segments of the economy. When the central bank maintains the current rate, it generally means that lending rates offered by banks and financial institutions are unlikely to rise in the near term. As a result, equated monthly instalments (EMIs) on loans — homes, vehicles, personal needs, corporate financing or small businesses — are expected to remain stable. Deposit rates are
In its February policy review, the Monetary Policy Committee (MPC) reinforced this stability-oriented approach. Following a 25-basis points rate cut in December, which was intended to support economic activity, the committee unanimously chose to keep the repo rate unchanged at 5.25 percent. By holding rates steady, the MPC signalled that it is closely monitoring economic conditions before making further adjustments, thereby ensuring that both borrowers and lenders operate in a relatively stable interest rate environment.
Growth, inflation forecasts to be revised
The MPC has forecast a lower growth of 6.9 per cent for FY2027 as against the revised FY2026 estimate of 7.6 per cent. Growth forecast for Q1 will be at 6.8%, Q2 at 6.7%, Q3 at 7% and Q4 at 7.2%, MPC said.
Coming to inflation, in January-February headline inflation continued to remain below target, it was 2.7% and 3.2% respectively, Malhotra said. CPI inflation in FY27 is projected at 4.6% with Q1 at 4, Q2 at 4.4, Q3 at 5.2 and then going down in Q4 to 4.7%.
Malhotra said the elevated imported inflation due to the rise in oil prices can widen the current account deficit. The MPC opined that the intensity and the duration of the conflict, as well as the impact of the conflict, have resulted in damage to the energy and other infrastructure at risk to the inflation and growth outlook, he said.
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He said elevated crude oil prices could increase imported inflation and widen the current account deficit. Second, disruptions in energy markets, fertilizers and other commodities may adversely impact industry, agriculture and services, reducing domestic output. Third, heightened uncertainty, increased risk aversion and safe haven demand could impact domestic liquidity conditions, economic activity, consumption and investment.
Fourth, weaker global growth prospects may dampen external demand and reduce remittance flows, he said. Finally, adverse spillovers from global financial markets could tighten domestic financial conditions and raise the cost of borrowing, some of which we have already witnessed. Overall, the initial supply shock can potentially transform into a demand shock over the medium term if the restoration of supply chains is delayed.
The RBI which lifted its FY26 GDP forecast to 7.4% from an earlier estimate of 7.3% in the February policy review has now raised it to 7.6%.
What the RBI says about the economic scenario
Malhotra said global growth faces increasing downside risks, as the sharp rise in energy prices and shortages, some of which we saw a correction today in the prices of energy, and shortages of inputs for various industries have stroked inflation fears and pushed up the geopolitical risk premium in the oil markets. “Heightened uncertainty precipitated by the ongoing conflict is weighing on the outlook. Safe haven flows have exerted depreciation pressure on currencies of major economies, as the US dollar strengthened, while commodity prices such as of metal and gold have moderated, he said,” he said.
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“Financial markets have become more volatile. Equities registered a broad-based correction. Sovereign bond yields, already elevated due to long-run fiscal sustainability concerns, driven by inflation fears, have hardened across major economies,” Malhotra said.
The MPC noted that since the last policy meeting, geopolitical uncertainties have heightened significantly. 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. Core inflation pressures remain muted, although supply chain dislocations and the risk of second round effects render the future inflation trajectory uncertain. The MPC further noted that high frequency indicators till February of this year suggest the continuation of strong momentum in economic activity, Malhotra said.
Growth impulses continue to be supported by robust private consumption and investment demand. However, the West Asia conflict is likely to impede this growth. Higher input costs associated with increased energy prices and international freight and insurance costs, along with supply chain disruptions that could constrain availability of key inputs for downstream sectors, would impair growth, Malhotra said.
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The Government has taken several measures targeted at supporting exports and protecting supply chains, he said. This should mitigate the adverse impact of the conflict. “The MPC opined that the intensity and the duration of the conflict, as well as the impact of the conflict, have resulted in damage to the energy and other infrastructure at risk to the inflation and growth outlook,” he said.
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