As the West Asia war raged and supply shocks rippled across the globe, the central bank’s monetary policy committee (MPC) chose to wait and watch as they kept the repo rate unchanged, minutes of the meeting released on Wednesday showed.
The six-member rate-setting panel, which met from 6 to 8 April, decided to hold the repo rate at 5.25%. In 2025, the RBI had cumulatively cut the repo rate—the rate at which it lends short-term funds to banks—by 125 basis points (bps), with the last cut of 25 bps in December.
The minutes showed that while members expect inflation to rise further, it would be primarily driven by supply shocks, something that monetary policy has limited control over.
Governor said that supply chain disruptions, which may take longer to subside fully and restore the logistics network, pose downside risks to growth and upside risks to inflation.
“As for monetary policy, this represents a supply shock,” Malhotra said in the minutes. “The underlying inflation pressures, minus the shock, are contained.”
He cautioned that a protracted conflict can make it harder for central banks to rein in inflation expectations while minimizing the growth sacrifice.
“With the announcement of the temporary ceasefire, however, there is a possibility of an early resolution of the conflict and normalization of supply chains. In such a situation, it is prudent to wait and watch, before making any decisive move,” Malhotra said.
On 8 April, RBI projected real growth for FY27 at 6.9%, and inflation at 4.6%. In a first, the central bank also released projections for core inflation—the rise in prices after stripping out the impact of food and energy price changes— at 4.4% for the year. Governor Sanjay Malhotra attributed the new projection to a demand from some quarters.
Deputy governor Poonam Gupta said that under the circumstances, central banks need to continue to play a conducive role in supporting the productive requirements of the economy. She was referring to the role of monetary policy when global uncertainty has risen from already high levels; the external shock is supply-driven; and inflation is likely to remain close to the target; while growth is expected to be subdued.
“Constant vigil is warranted while waiting to ascertain the persistence of the supply shock, if any,” said Gupta.
RBI executive director and internal member of the Indranil Bhattacharyya said that supply-driven inflation warrants a distinctly different policy response than a demand-driven one. Supply-driven inflation occurs when prices rise due to supply bottlenecks, not higher demand.
“Monetary policy has limited ability to quell the direct effects of a supply-induced inflation shock; it only has operational relevance once second-round effects are apparent,” said Bhattacharyya.
He said that the second-order effects are manifested in rising prices and wages when inflation expectations get un-anchored, which is not evident at present.
“As long as (inflation) expectations remain anchored, looking through the shock is optimal since any pre-emptive response merely sacrifices output without delivering any significant gain on the inflation front,” he said.
India’s retail inflation measured on the consumer price index increased to 3.4% in March, from 3.21% in February.
Economists now expect MPC members to exercise patience and see through the jump in inflation.
“Our baseline forecast at this stage is that the RBI will likely embark on a 100bps rate hike cycle only from 2027. Only if the supply shocks lead to a spillover into core CPI persistently, then the need for a rate hike will arise on a proactive basis,” Kaushik Das, chief economist – India, Malaysia, and South Asia at Deutsche Bank AG said in a note on Wednesday.
Meanwhile, external MPC members were also in favour of waiting to see how the conflict and the ensuing disruptions take shape, instead of reacting right away. Nagesh Kumar said that with the combined effect of rising crude prices, exchange rate movements, and possible effects of input costs on food prices, among others, the headline inflation is projected to rise to 4.6% in FY27 from a very benign level of 2.1% in FY26.
“The dramatic rise in , however, is clearly resulting from a supply shock and not a demand-push one. In the current highly uncertain economic environment, prudence requires a status quo on monetary policy action,” said Kumar.
Meanwhile, Saugata Bhattacharya said that the risks of a policy mistake have heightened amidst this uncertainty.
“Arguments for increasing the policy rate in anticipation of higher inflation are as risky as cutting rates in response to a fear of lower growth,” he said. “The challenge is to determine the extent of the shocks being transitory versus persistently percolating through the economy, and the time expected for both inflation and growth to revert to targets.”
Lastly, Ram Singh said there seem to be many unknown unknowns whose direct and indirect economic impacts are unquantifiable and, therefore, it was prudent for the monetary policy to be data-driven with a focus on keeping inflation expectations anchored.
“To maintain enough elbow room to move the rate in either direction should we end up with an unexpected situation,” said Singh.