By Kimberley Kao and Fabiana Negrin Ochoa
India’s central bank held interest rates steady on Friday, opting to pause as it assesses the impact of the Middle East conflict on the nation’s currency and broader economy.
The Reserve Bank of India met against a backdrop of sharp rupee depreciation and acute economic risks, driven by the Iran crisis pushing up energy prices and threatening to stoke domestic inflation.
The RBI monetary policy committee revised down its growth forecasts and increased its inflation projections, but voted unanimously to hold the policy repo rate at 5.25%. This marks the central bank’s third consecutive pause following a rate cut delivered in December.
Nine out of 11 economists surveyed by The Wall Street Journal had expected the RBI to stand pat on Friday, with two forecasting a 25-basis-point rate increase.
The RBI also voted to maintain a neutral monetary policy stance, extending its wait-and-see approach as geopolitical uncertainty dominates the outlook.
“Faced with difficult trade-offs, monetary policy has turned more cautious,” said RBI Gov. Sanjay Malhotra. “The MPC felt it would be prudent to wait for greater clarity to emerge,” he said.
So far, the Indian economy has held up well against the headwinds stemming from the conflict, the governor said.
Headline inflation remains below target as the pass-through of higher global prices to the domestic costs has been limited, the RBI noted. Private consumption has been resilient, alongside fixed investment and exports.
Still, the bank raised its inflation projection for the current fiscal year to 5.1% from 4.6%, warning it could rise further due to supply chain disruptions, commodity price volatility, and weather shocks.
The RBI also trimmed its growth forecast for the current fiscal year ending March to 6.6% from 6.9%. This would still represent a solid pace of growth, particularly amid the current climate of geopolitical uncertainty.
“The Indian economy entered this episode of global turbulence with much better fundamentals than in previous similar episodes,” the RBI governor said.
Ahead of Friday’s decision, the rupee’s relentless slide had fueled speculation that the central bank might deliver its first interest-rate hike in three years.
The Indian currency has shed more than 6% against the dollar so far in 2026, pressured by elevated oil prices that threaten to swell India’s import bill and spur inflation.
Malhotra said the RBI was prepared to curb excessive volatility and disorderly market movements as required. The rupee strengthened following the remarks, with the dollar dropping 0.4% to 95.4075 rupees, according to LSEG data.
“But with inflation rising and pressure on the rupee likely to remain, we think the repo rate will be hiked by a cumulative 75bps, taking it to 6.00% by the end of the year,” said Shilan Shah, deputy chief emerging markets economist at Capital Economics.
Write to Kimberley Kao at kimberley.kao@wsj.com and Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com
(END) Dow Jones Newswires
06-05-26 0325ET
