RBI stands firm in April but signals Iran war risks

RBI stands pat amid Iran war: On 8 April, the monetary policy committee of the Reserve Bank of India (RBI) voted unanimously to leave its policy rate at 5.25%. April’s hold had been largely priced in by the market, with the RBI still expected by economists to stand pat for the foreseeable future amid the Iran war.

RBI hikes inflation forecasts and signals upside price risks: In post-decision comments to the press, Governor Sanjay Malhotra said that the monetary policy committee had deemed it “prudent to wait and watch” how the outlook for GDP growth and inflation evolves in the near term, with risks including the protracted Iran conflict and the likely emergence of an El Niño weather pattern this year. As a result of the Iran war and El Niño, the RBI hiked its inflation forecasts for the fiscal year ending March 2027 (FY 2026) by 0.4 percentage points to 4.6% and said price risks were to the upside. The RBI also published its first-ever forecast of core inflation, pegging it at 4.4% for FY 2026. Both projections are above the Bank’s 4.0% inflation target.Meanwhile, the RBI left its forecast for GDP growth in FY 2026 unchanged at 6.9%, slightly above our Consensus, bolstered by recent trade deals and a relatively expansionary budget.

RBI maintains a neutral stance: The monetary policy committee decided to leave its monetary policy stance as ‘neutral’, in line with our Consensus Forecast for the RBI to keep rates steady for the near future. Still, the era of what the RBI Governor had called India’s “rare Goldilocks period” of low inflation and strong GDP growth is being threatened by the Iran war. The RBI said its forecasts assume that oil prices average USD 85 per barrel this year, but added that a 10% upside deviation from this projection would push up inflation by 0.5 percentage points, meaning price growth would be notably above the 4.0% target.The RBI’s next meeting is set for 3–5 June.

Panelist insight: EIU analysts align with our Consensus view: “We expect the repo rate to remain at 5.25% throughout 2026, with the neutral stance preserved well into the medium term. Risks to the inflation trajectory beyond crude oil and metals prices include an evolving El Niño situation or any sustained shortage of fertiliser, either of which could have an adverse effect on food prices […]. We judge the risk of a tightening cycle starting in [calendar year] 2026 at a slim probability of 15%.”Economists at Goldman Sachs are more hawkish:“We maintain our call of 50bp policy rate hikes in [calendar year] 2026: We continue to expect a cumulative 50bp of policy rate tightening in 2026, as we expect core goods inflation to firm in 2H CY26, as manufacturers pass through higher input costs. That said, the overnight de-escalation in the Middle East conflict and the INR's over 2% appreciation (vs. USD) following the RBI's regulatory intervention, increase the risk that the MPC opts to remain on hold for longer.”

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