The central bank said rising global uncertainties are beginning to pose risks across sectors, with the impact likely to build if supply disruptions persist. It flagged that an initial supply shock could turn into a broader demand shock over time if normal supply chains are not restored.
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First, the RBI said elevated crude oil prices could increase imported inflation and widen the current account deficit. Second, disruptions in energy markets, fertilisers, and other commodities may hit industry, agriculture, and services, leading to lower domestic output.
Third, the RBI noted that heightened uncertainty, rising risk aversion, and demand for safe-haven assets could tighten domestic liquidity conditions and affect consumption and investment. Fourth, weaker global growth prospects may reduce external demand and lower remittance inflows.
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Finally, the central bank warned that spillovers from global financial markets could tighten domestic financial conditions and push up borrowing costs, adding that some of these effects are already visible.
India, which relies on the Middle East for about half of its crude and most of its cooking gas, has been hit hard by the effective closure of the Strait of Hormuz. The rupee has tumbled around 7% over the past year, making it one of Asia’s worst-performing currencies.
Repo rate decision
The central bank held interest rates in its first policy decision since the Middle East war erupted, as it grapples with a sharply weaker rupee while trying to support economic growth.
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The central bank’s six-member Monetary Policy Committee voted unanimously to keep the benchmark repurchase rate at 5.25%. The policy stance was retained at neutral.
Growth & inflation forecasts
The central bank released its first economic forecasts for the current financial year, with GDP growth forecast to fall to 6.9% in 2026-27 from an expected 7.6% in the year ended March 31, 2026.
Average inflation for the year is seen at 4.6%, within the central bank’s target band of 2-6%. For the 11 months of 2025-26 for which data is available, average inflation was at 1.95%.
The central bank also, for the first time, offered a forecast for core inflation, which it sees at 4.4% this financial year.
India’s economy was forecast to grow by more than 7% in the fiscal year that began on April 1, according to government estimates released in February, while inflation was expected to remain close to the central bank’s target of 4%.
India’s benchmark 10-year bond yield moved slightly higher to 6.92% after the policy decision, while the rupee was largely unchanged around 92.54. Benchmark equity indexes were also largely unchanged after the decision and held on to their 3.6% gains for the day.