Overview
India's central bank is forecast to keep its key interest rate unchanged at the upcoming policy meeting as officials assess the economic repercussions of the war in Iran. The conflict has unsettled markets, weakened the rupee and driven up yields on government bonds, prompting policymakers to focus on market stabilization and liquidity rather than immediate rate moves.
Market backdrop and policy stance
In a Reuters poll conducted March 23-26, 71 economists were asked about the Reserve Bank of India's next move; all but two predicted the central bank would hold the benchmark repo rate at 5.25%. The Monetary Policy Committee had loosened policy earlier in 2025, cutting rates by a total of 125 basis points, before opting to pause at its February meeting.
RBI Governor Sanjay Malhotra described the economy in December as being in a "Goldilocks" phase - a combination of strong growth and low inflation that allowed scope for an extended period of loose policy. That characterization has been challenged by what is described in the policy debate as the worst energy shock in decades, generating a new set of risks for growth and prices.
Growth and inflation risks
Economists point to a tension between slowing growth and rising inflation driven by higher energy costs. Pranjul Bhandari, chief India economist at HSBC, wrote in an April 2 report that "If the energy shock lingers, the growth drag could outstrip the price shock, reminiscent of the COVID-19 pandemic economy." She argued this mix of weaker growth and higher inflation supports a "neutral policy" stance that neither stimulates nor restrains demand.
Officials at the RBI are scheduled to publish their first projections for growth and inflation for the 2026-27 financial year. Analysts expect the central bank to trim previously upbeat forecasts, with much of the revision hinging on the oil-price assumptions used in preparing those baseline scenarios.
HSBC's sensitivity analysis cited in market commentary shows GDP growth slowing to 6.3% from an expected 7% if oil averages $80 per barrel. Growth would slow further to 6% if oil prices remain closer to $100 per barrel. Inflation, which cooled to 3.2% in February, could average around 5% under a sustained $100 oil scenario.
J.P. Morgan's chief India economist Sajjid Chinoy said in a March note that rising inflation risks have strengthened the view that the RBI will keep policy rates "firmly on hold." He added: "The bar for any rate hike is very high and would require a sustained supply shock that pushes headline inflation well above target for the foreseeable future." India’s inflation target was reaffirmed last month at 4%, with a tolerance band of plus or minus 2 percentage points.
Financial market reaction
Since the Iran conflict intensified, market pricing has shifted toward a more hawkish risk scenario. Traders in the overnight indexed swap market have moved aggressively to incorporate the possibility of rate increases, with one-month OIS contracts reflecting expectations of a hike as early as this month. Neeraj Gambhir, executive director for treasury, markets and wholesale banking products at Axis Bank, said swap rate pricing suggests investors believe the central bank may ultimately need to tighten policy to defend the currency.
Concerns about a widening current account deficit and foreign capital outflows have pushed the rupee to record lows beyond 95 per U.S. dollar. At the same time, the yield on India’s benchmark 10-year government bond has climbed to about 7.14%, its highest level in nearly two years, as investors worry about the strain higher energy costs place on government finances.
Central bank tools to steady markets
Analysts and market participants expect the RBI to prioritize market support over rate hikes. Aastha Gudwani, chief India economist at Barclays, said she expects the central bank to continue "injecting abundant liquidity into the system, ensuring easy financial conditions to help the economy tide over the shock." Barclays anticipates continued bond purchases, short-term liquidity injections and longer-term foreign-exchange swap operations as part of the toolkit.
The RBI has already taken steps intended to curb speculation in foreign-exchange markets. Further interventions to support the rupee are not off the table, including potential measures such as a special forex swap window for oil companies or schemes to encourage inflows from non-resident Indians, Gudwani said. She added that using interest-rate increases to defend the currency would not be the central bank's first option.
Outlook and policy calibration
With forecasts for the coming financial year due to be published alongside the policy decision, much will depend on how long energy prices remain elevated and whether supply disruptions continue. Economists have outlined a wide range of scenarios based explicitly on those oil-price assumptions, producing materially different paths for both growth and inflation.
For now, the prevailing view among many economists and market observers is that the RBI will hold policy steady while deploying liquidity and market operations to limit the fallout from higher energy prices and exchange-rate stress. Any decision to move rates would, according to market notes from leading banks, require a prolonged and substantial shift in the inflation outlook beyond what is currently priced into markets.
Reporting note: This article synthesizes market commentary and economists' projections, and it presents the range of views being factored into India's current monetary-policy debate.