India’s monetary policy: The RBI did what was apt amid a war haze that will take time to clear up

As widely expected, its rate-setting panel voted in unison to hold the repo rate—at which RBI lends short-term money to banks—unchanged at 5.25%. The rates at which it absorbs and injects liquidity (in last-resort cases) stay a quarter of a percentage point below and above that key rate, respectively.

The news of a ceasefire had broken only hours before RBI’s policy announcement; that it found mention in governor Sanjay Malhotra’s speech was not remarkable, given its potential significance, but since the war’s disruption has already caused plenty of damage, RBI’s forecasts may need only minor revisions if peace does come to prevail.

RBI sees inflation hitting 4.6% in 2026-27, up from 4.2% predicted earlier, largely as a result of inflationary impulses spawned by supply snarls. India’s GDP growth is seen dipping to 6.9% in 2026-27 from 7.6% last year.

Since supply shocks unsettle both price stability and the economy’s expansion, RBI could not have tried to tackle either without being sure of which was at greater risk.

Growth seems more secure. In RBI’s assessment, rural and urban demand are in fine fettle, with both expected to strengthen further. A boost from last year’s GST reset has helped and farm conditions are seen to be broadly favourable. RBI also expects a revival in private investment to sustain amid high capacity utilization and strong credit growth.

Whether overall capital formation can regain its past record, however, remains unclear. The farm sector’s prospects, meanwhile, seem clouded by the possibility of El Niño dryness this year that may hurt post-monsoon harvests; freak rainfall in the north may already have hurt spring crops. On the whole, this may impact inflation more than output.

In any case, our general price levels are unlikely to escape the war’s overhang. The ripple effects of costlier energy imports and a weakened rupee may appear less severe than feared just days ago, but the crude-oil price that RBI assumed for its math was raised by just $15 to $85 a barrel this fiscal year.

While Brent has softened, oil-and-gas volatility may persist. Where hydrocarbon prices might settle will be hard to gauge before the Gulf’s sandstorm settles to reveal the region’s supply capacity.

And then, there is also the rupee to think about. Our currency began weakening well before the war started stoking inflation and skewing our external balances. Malhotra reiterated RBI’s policy of not targeting any specific level and acting only to curb excessive volatility. This would reassure those who are wary of a currency peg in the guise of a managed float, but not those hurt by drastic depreciation.

While RBI’s efforts to curb forex speculation have made a difference, if capital inflows do not stage a comeback, it may need to use other measures to attract dollars (perhaps from non-resident Indians); or even tighten outflows.

Why foreign investments have thinned out, however, is a question for the government to mull over. Some of it may be beyond its control, but India’s taxation of capital gains has grown in recent years; easing this burden might send a signal that draws global investors back to Indian assets, thus lending the rupee some stability.