India central bank holds rates as Mideast crisis fans growth, inflation risks

India’s central bank kept interest rates unchanged on Wednesday, citing heightened uncertainty after the Middle East crisis pushed up energy costs and disrupted gas supplies globally. The Reserve Bank of India (RBI) said the situation has increased risks to both growth and inflation, after what it described as a “Goldilocks” phase for the economy. Officials also reiterated their intent to limit excessive swings in the rupee while maintaining adequate banking-system liquidity.

25% and to retain its “neutral” policy stance. RBI Governor Sanjay Malhotra said it was “prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook,” pointing to the uncertain path of energy prices and supply conditions. In a press conference, Malhotra said that in the short to medium term it is “quite possible” low rates could persist, when asked about his February guidance.

Overnight, the U.S and Iran announced a two-week ceasefire after more than a month of fighting. Officials said the conflict had lifted oil prices sharply and disrupted gas supply to economies worldwide, even as oil prices fell sharply in Asia on Wednesday following the ceasefire news. India is particularly exposed because it imports about 90% of its oil, making prolonged disruptions a key vulnerability for inflation and the external balance.

The RBI published its first forecasts for the current financial year, projecting GDP growth of 6.9% in 2026-27, down from an expected 7.6% in the year ended March 31, 2026. It forecast average CPI inflation at 4.6%, within its 2–6% target band, and for the first time provided a core inflation forecast of 4.4% for this financial year. For the 11 months of 2025-26 for which data is available, average inflation was 1.95%.

The central bank said its projections assume an average oil price of $85 per barrel. In a separate Monetary Policy Report, it said a 10% increase above that level could raise inflation by 50 basis points and reduce growth by 15 basis points.

Malhotra said inflation is currently in check but risks are “on the upside,” adding that higher oil prices and shortages of key inputs such as gas could weaken growth momentum, and that an initial supply shock could become a demand shock if supply-chain restoration is delayed.

Market moves were mixed after the decision. India’s benchmark 10-year bond yield edged up to 6.92%, the rupee was marginally weaker at 92.62, and benchmark equity indexes extended gains to nearly 4% on the day. The RBI said the rupee has depreciated more than average despite strong fundamentals, falling 11% in financial year 2025-26, the most in over a decade, as foreign funds pulled nearly $19 billion from markets between March and early April.

Malhotra said the RBI will “judiciously contain excessive or disruptive volatility” so that self-fulfilling expectations do not drive currency moves beyond what fundamentals warrant. Economists’ expectations were broadly aligned with the outcome: 69 of 71 economists in a March 23–26 poll forecast no change.

Uncertainty remains around the duration of energy and supply disruptions and how quickly supply chains normalise, which officials and economists said will shape the growth-inflation trade-off ahead.