The Reserve Bank of India India’s (RBI) rate-setting panel decided to keep interest rates on hold at its last meeting on the back of uncertainty over the West Asia conflict, with governor Sanjay Malhotra saying he prefers a “wait and watch” approach.
Across the six-member committee, uncertainties over inflation in the coming months resonated in the June meeting.
“We should remain watchful and wary about the generalization of inflation in the coming months,” Malhotra wrote in the minutes published on Friday. “Going forward, revision in retail prices of petrol and diesel in May would lead to higher fuel inflation in the coming months.”
At its 3-5 June meeting, the Monetary Policy Committee (MPC) unanimously voted to keep the key repo rate unchanged at 5.25%, while acknowledging that there were considerable risks to its assessments of inflation and growth. The panel raised its retail inflation outlook for financial year 2027 to 5.1% from 4.6% projected earlier and cut growth estimates to 6.6% in FY27, from 6.9% earlier.
Since the meeting, the US and Iran decided to halt the war, a move expected to ease pressure on the currency and crude prices, but not enough to allow the RBI to lower its guard.
In the minutes of the meeting, Malhotra cited four reasons to keep the repo rate on pause. First, he said there is high uncertainty in the assumptions made for projections of inflation and growth—the duration of the West Asia war, the disruption in supply chains, the intensity and geographical spread of monsoons, among others. Second, while headline inflation is projected to be on the higher side of RBI’s tolerance band of 2-6%, core inflation for 2026-27 is projected at 4.7%.
Three, he said that most of the increase in the projected headline inflation between April policy and June is driven by food and fuel. Finally, although inflation outlook is more relevant for monetary policy, current inflation numbers need to be taken into consideration, especially since the outlook is clouded.
Inflation, as measured by the consumer price index (CPI), inched up to 3.93% in May, from 3.48% in April.
RBI deputy governor Poonam Gupta said that the MPC should wait a bit more for global as well as weather-related uncertainties to play out over the coming months, before taking a call on whether and when to reverse the policy cycle.
She said that at the current juncture, with growth projected to decelerate and inflation yet to become entrenched, there is no case for policy tightening to rein in inflation or inflationary expectations.
“If anything, it could make the economic pain of the ongoing supply shock sharper,” said Gupta.
She added that once the West Asia conflict is resolved, the outlook, both for India as well as globally, could improve rapidly, warranting a fresh look at the inflation-growth dynamics.
In fact, Mint reported on Friday that the government is contemplating a imposed during the West Asia conflict after US and Iran decided to go ahead with the peace deal. The move is expected to lower inflation. When the war raged, oil marketing companies had imposed restrictions on the sale of petroleum products under government directives.
“Inflation projections are subject to several uncertainties in the present context,” said RBI executive director and MPC member Indranil Bhattacharyya.
Bhattacharyya said that while , one needs to wait for its pass-through to retail inflation.
“Moreover, the spatial and temporal distribution of monsoon, which is critical for crop outlook, is not yet known. The impact of the projected El Niño conditions is conditional on the Indian Ocean Dipole (IOD) situation, which may partly mitigate the impact,” said Bhattacharyya.
He also drew comfort from the fact that the government has undertaken measures to moderate the impact of a deficient monsoon. “…I feel it is prudent to wait for greater clarity to emerge from the data before deciding on any policy action. Accordingly, I vote for a pause on the policy rate while retaining the neutral stance.”
In 2025, the RBI had cumulatively cut the repo rate—at which it lends short-term funds to banks—by 125 basis points (bps), with . Economists now expect the rate hike cycle to begin in August or October.
Meanwhile, external member Saugata Bhattacharya said that given the multiple overlapping geo-economic shocks clouding the future, the risk management is now the most sensible approach to monetary policy responses.
“The chances of a policy mistake remain heightened given the two-way risks on the inflation-growth outlook,” said Bhattacharya. “However, given the MPC forecasts on growth and inflation, and factoring in the elevated and rising inflation expectations, we must now closely monitor second order input cost transmission getting embedded in retail inflation.”
According to Bhattacharya, energy prices are unlikely, in the near or even the medium term, to return to their pre-conflict levels.