RBI keeps repo at 5.25% amid Iran war risks 2026

Why the RBI decision matters right now

India’s central bank faced a difficult policy call as the Middle East conflict triggered an energy shock, pushed the rupee to record lows, and raised uncertainty around growth and inflation. Higher crude prices matter more for India than most peers because the country imports about 90% of its oil needs. A rate hike can support the currency by improving yield appeal, but it can also tighten financial conditions at a time when the growth outlook is turning less certain. Investors were also watching for any sign that the Reserve Bank of India (RBI) would shift away from its “neutral” stance, especially after sharp moves in oil and foreign flows.

The rate call: hold versus hike was finely balanced

Ahead of the meeting, economists largely expected the RBI to stay put, even as market pricing began to lean toward tighter policy over the next year. Nearly 80% of 56 economists polled by Reuters expected the policy repo rate to remain unchanged at 5.25%. Of the rest, 11 expected a 25 basis-point hike and one expected a larger 50 basis-point increase. The debate intensified because the rupee had weakened sharply after the Iran war broke out at the end of February, amplifying imported inflation risks.

Rahul Bajoria, chief India economist at BofA Global Research, described the situation as a “dilemma” between responding to market pressure and sticking to incoming data. He argued that holding rates while using more hawkish guidance could be an “elegant compromise”, signalling vigilance without appearing to panic about exchange-rate stability.

What the RBI decided on April 8

On April 8 in Mumbai, the RBI kept its key policy rate unchanged and signalled a wait-and-watch approach as it assessed how the war and energy disruptions would feed through to the economy. The six-member Monetary Policy Committee (MPC) voted unanimously to keep the repo rate steady at 5.25%. All six members voted to hold, and the MPC decided to continue with its “neutral” stance.

RBI Governor Sanjay Malhotra said it was “prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook.” He added that while inflation remains in check, risks are tilted to the upside, pointing to higher oil prices and shortages of key inputs such as gas. Malhotra also warned that the initial supply shock could turn into a demand shock over the medium term if supply-chain restoration is delayed.

The war backdrop: ceasefire relief, but uncertainty remains

The policy decision came as the U.S. and Iran announced a two-week ceasefire after more than a month of fighting, easing immediate fears of an extended supply shock. Oil prices fell sharply in Asian trade on the ceasefire news, but the RBI noted they remained well above levels seen a few months earlier. For India, the impact channel is direct: higher crude raises import costs, widens external balances, and can lift inflation through transport and input costs.

Market participants also focused on how fragile the truce could be and what that implied for volatility in oil, freight, and supply chains. The RBI’s messaging reflected that uncertainty, with policymakers emphasizing vigilance rather than committing to a near-term tightening cycle.

Rupee pressure and capital flows in focus

Currency weakness was a central part of the policy backdrop. The rupee tumbled to record lows after the conflict, and Reuters reported foreign funds pulled nearly $19 billion from markets between March and early April. In another snapshot of stress, the rupee was described as down 5.4% this year, placing it among Asia’s worst performers.

After the April 8 policy decision, India’s benchmark 10-year bond yield moved slightly higher to 6.92%, while the rupee was marginally weaker at 92.62 per U.S. dollar. Equity benchmarks added to gains, rising nearly 4% on the day. Separately, another report noted the rupee appreciated by 50 paise to 92.56 after the ceasefire announcement, underlining how quickly sentiment was moving with headlines.

RBI forecasts: slower growth, inflation within band

The RBI released its first economic forecasts for the current financial year. It expects GDP growth to slow to 6.9% in 2026-27 from an expected 7.6% in the year ended March 31, 2026. Average inflation is seen at 4.6% for the year, within the RBI’s 2% to 6% target band. The central bank also, for the first time, offered a core inflation forecast of 4.4% for the year.

For the 11 months of 2025-26 for which data was available, average inflation was 1.95%. Another data point cited in the reports was February CPI inflation at 3.21%, closer to the RBI’s 4% medium-term target.

Oil assumptions and the RBI’s shock math

A key detail in the RBI’s projections was the oil-price assumption. The central bank assumed an average oil price of $15 per barrel. It also quantified sensitivity: a 10% increase in prices above that level could push up inflation by 50 basis points and reduce growth by 15 basis points, according to a separate Monetary Policy Report. That guidance matters because it links the external shock to the RBI’s reaction function, and helps investors benchmark what a prolonged energy spike could do to the policy path.

What markets had priced in before the decision

Interest rate derivatives were already pointing to tighter conditions ahead. Interest-rate swaps were pricing in nearly 100 basis points of tightening over the next 12 months, with the one-year OIS rate up by 65 basis points since March. At the same time, the RBI’s key policy rate has been unchanged since December, following 125 basis points of rate cuts last year. This combination of a steady policy rate and rising market-implied rates framed the risk that any surprise hike could further unsettle the rates market.

Policy framework context: inflation targeting renewed

This policy review also came after India renewed its inflation-targeting framework. The central bank is mandated to maintain retail inflation at 4%, with a tolerance band of 2 percentage points on either side, for another five-year period ending March 2031. That formal mandate supports the RBI’s emphasis on keeping inflation expectations anchored, even when shocks originate from outside India.

Key figures at a glance

How analysts framed the next steps

Analysts differed on how quickly the RBI should move if currency weakness persists. Some argued policy needs to come to the rupee’s defence sooner, noting rate hikes by oil-importing peers such as Indonesia, the Philippines, and Sri Lanka. Reuters also reported that India’s central bank does not favour using monetary policy specifically to defend the rupee.

Carl Vermassen of Vontobel Asset Management called a pre-emptive hike a potentially “positive trade-off” in the current context, given FX stress. Citi’s chief India economist Samiran Chakraborty argued the RBI may have limited scope for a pre-emptive hike amid wide uncertainty, but said an above-5% inflation forecast for the second half of fiscal year 2026-27 could be used to justify more hawkish guidance.

Conclusion

The RBI’s unanimous decision to hold the repo rate at 5.25% reflects a cautious strategy as policymakers weigh an oil-driven supply shock, a stressed currency, and an evolving growth-inflation balance. With the bank’s forecasts now incorporating an $15-per-barrel oil assumption and explicit shock sensitivities, upcoming data on inflation, activity, and currency conditions will shape how long the “wait and watch” stance can hold in practice.