The Reserve Bank of India (RBI) has paused its rate-easing cycle amid the US-Israel war with Iran while indicating that interest rates will likely remain low despite the geopolitical turbulence and instability in oil prices.

The repo rate is thus held at 5.25% by the RBI-led monetary policy committee (MPC), which met at a time when the six-week-long Iran war had disrupted energy supplies, elevated crude oil prices, weakened the Indian rupee against the dollar and created inflationary pressures. There was also the hope of a two-week ceasefire ending hostilities after US President Donald Trump had warned that “a whole civilisation will die tonight” if Iran did not reopen the Strait of Hormuz.

RBI Governor Sanjay Malhotra said Wednesday interest rates may remain low for a long time on the back of benign inflation and strong macroeconomic fundamentals. The Indian economy remains “very strong, resilient and robust” despite shocks like the conflict in West Asia, he stressed.

The MPC also maintained its stance as ‘neutral stance’, prioritising stability over any rate actions in its first policy in the current financial year as the Iran war brought back the need to balance growth and inflationary pressures. 

“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 told reporters. 

This is the second straight time that the MPC decided to pause interest rates, after reducing the repo rate by 25 basis points in the RBI’s December monetary policy. Since the rate-easing cycle in February last year, the RBI has reduced the key repo rate by 125 basis points to 5.25% as it sought to lower borrowing costs and focus on growth.

The RBI’s MPC unanimously decided to pause the interest rate and adopt a cautious “wait-and-watch” approach. In its assessment, the rate-setting committee had factored in the recent ceasefire developments, Malhotra said, adding that external shocks, including geopolitical tensions, continue to pose risks to inflation and growth, necessitating a calibrated policy approach. 

“The economy is confronted with a supply shock. It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook. Accordingly, the MPC voted to keep the policy rate unchanged even as it remains vigilant, closely monitoring incoming information and assessing the balance of risks. The MPC also decided to continue with the neutral stance, retaining the flexibility to respond judiciously to incoming information,” Malhotra said in a statement.

On transmission of rate cuts, Malhotra said banks have passed on about 90 basis points reduction on the lending side against a drop of 125 basis points in repo rate since February last year.

"Similarly, on the deposit side, it's more than 100. So, there has been a satisfactory transmission," the RBI Governor added.

Malhotra said the MPC in its policy review has taken into account the ceasefire.

A day before the policy announcement, US President Donald Trump announced a two-week ceasefire with Iran.

GDP projection

The RBI projected growth at 7.6% for the financial year 2025-26 under the new series, which is higher than the 7.4% estimated in the February policy. 

Real GDP is projected at 6.9% for FY27 as risks from high energy prices are likely to impede growth.

"Taking all these factors into consideration, real GDP growth for 2026-27 is projected at 6.9%, with Q1 at 6.8%; Q2 at 6.7%; Q3 at 7%; and Q4 at 7.2%," Malhotra said.

For its growth estimates, the RBI has assumed crude at an average of $85 per barrel in FY27.

“Going forward, elevated energy and other commodity prices, as well as shocks to availability of inputs due to disruptions in the Strait of Hormuz, are likely to impact growth this year,” Malhotra said.

Inflation

With oil prices on the boil, inflation is likely to shoot up. 

For FY27, the RBI has projected inflation at 4.6%, well within the target band of 2-6% but significantly higher than the last year’s estimate of 2.1%.

“Upside risks to the inflation outlook driven by increased energy prices, pressures and probable weather disturbances affecting food prices have increased,” Malhotra said.

As per the RBI estimates, inflation for Q1 of FY27 would be at 4%, Q2 at 4.4%, Q3 at 5.2% and Q4 at 4.7%.