RBI holds repo rate, flags supply chain risks to inflation & growth

Mumbai: The Reserve Bank of India (RBI) Wednesday kept its key policy rate unchanged amid the ongoing West Asia crisis, warning that supply chain disruptions pose upside risks to inflation and downside risks to growth in the current fiscal year, while reiterating that interest rates are likely to remain low in the short to medium term.

The six-member Monetary Policy Committee (MPC) unanimously voted to keep the repurchase (repo) rate at 5.25%, in line with market expectations, and maintain a neutral stance.

The West Asia conflict and the resulting spike in energy prices weighed heavily on the policy commentary.

Cautious Approach
He said the committee assessed the “intensity and duration of the conflict, and the resultant damage to energy and other infrastructure, add risks to both inflation and growth outlooks,” even as the MPC opted to maintain the status quo.

The RBI projected real GDP growth at 6.9% and headline inflation at 4.6% for FY27, based on a baseline assumption of crude oil prices at $85 per barrel in the current fiscal year and $75 per barrel in the next. For the first time, the central bank also provided a projection for core inflation (excluding food and fuel) at 4.4%.

Both inflation estimates remain within the RBI’s target band of 2-6%, though governor Malhotra said risks to the projections are tilted to the downside amid elevated geopolitical uncertainty.Stocks, rupee advance
Markets reacted positively to the news of the ceasefire, with benchmark bond yields falling 15 basis points to 6.89%, rupee strengthening 40 paise to 92.58 per dollar and Sensex rising 3.95% to close at 77,562.

The governor warned that elevated energy and commodity prices, particularly disruptions related to the Strait of Hormuz, could weigh on growth in 2026-27. He said the conflict could affect the economy through higher crude prices, supply disruptions and global financial spillovers, adding that prolonged supply shocks could eventually translate into weaker demand.

Economists remained cautious on the policy outlook.