The Reserve Bank has decided to keep interest rates unchanged and retained a neutral stance on them for now. The decision, which came hours after the announcement of a two-week ceasefire in the West Asia war, sounded cautious as it also flagged the risks of crude price spikes, supply chain disruptions and heightened global uncertainty. Governor Sanjay Malhotra noted the risk of the initial supply shock potentially ending up as a demand shock.
Citing volatile energy prices and supply bottlenecks, the central bank moderated its estimate for real GDP growth in 2026-27 to 6.9 percent, assuming crude prices would average at $85 a barrel through this fiscal. If, as private forecasters foresee, India’s crude basket averages $90 instead, growth could slip further to 6.7 percent. Analysts insist that the RBI’s projections are optimistic and would need reassessment once clarity on infrastructure damage and supply chain restoration emerges months later.
Many expect the RBI to maintain an extended pause on rates, ensuring lower borrowing costs. Malhotra’s commitment towards liquidity management is an indication that the policy remains soft. For instance, at ₹2.3 lakh crore, systemic liquidity is so abundant that overnight rates are lower than repo. And given the governor’s specific mention of elevated commercial paper and deposit rates, Wednesday’s decision is seen as dovish, ruling out a hike anytime soon. Some economists reason that a prolonged war could mean lower growth, and thus lower rates. Yet others believe that the bar for a hike remains high—if supply shocks drive headline inflation well above target and if energy price pressures spill into core inflation and price rise expectations, rate hikes would not be too far.
For now, the inflation estimate for 2026-27 is pegged at 4.6 percent. The core inflation reading of 4.4 percent is prompting policy-watchers to conclude that the central bank is willing to look through a transitory price rise. However, if price pressures persist, the upside risks to retail inflation are inevitable. It’s also true that given that many producers are absorbing the input shortages and price spikes for now, the overall fallout will depend on the duration and intensity of the conflict. Which is why the RBI must stand ready with policy tools—not only to douse inflationary fires, but also to ensure financial and currency stability.