RBI Holds Repo Rate at 5.25%, Flags Geopolitical Risks

The Reserve Bank of India’s Monetary Policy Committee (MPC), in its first bi-monthly meeting for the 2026-27 fiscal year, has decided to keep the benchmark repo rate unchanged at 5.25%. The decision, announced by Governor Sanjay Malhotra on April 8, 2026, was unanimous among the six-member committee. The MPC also maintained its 'neutral' policy stance, signaling a cautious, data-dependent approach amid a complex global economic environment.

A Prudent Pause Amid Uncertainty

This marks the second consecutive meeting where the central bank has held the key lending rate steady. The last adjustment was a 0.25% cut in December 2025. The decision to pause reflects a 'wait and watch' strategy as the RBI assesses the economic impact of heightened geopolitical tensions in West Asia. Governor Malhotra highlighted that the conflict could pose significant risks to India's growth trajectory through higher input costs, disruptions in energy markets, and supply chain dislocations.

Economic Growth Projections

Despite external headwinds, the RBI presented a picture of resilient domestic economic activity. The central bank retained its real GDP growth estimate for the recently concluded fiscal year 2025-26 at 7.6%. For the current fiscal year 2026-27, GDP growth is projected to moderate to 6.9%. This moderation is partly attributed to a high statistical base from the previous year. The growth outlook is supported by strong domestic demand, a robust services sector, and improving manufacturing capacity utilisation.

Inflation Outlook and Key Risks

The MPC projects Consumer Price Index (CPI) inflation to average 4.6% for FY27, which remains within its target band of 2-6%. While headline inflation was contained at 3.2% in February 2026, the RBI flagged clear upside risks. The primary concern stems from volatile global energy prices, with crude oil trading above $100 per barrel. Other risks include potential supply chain disruptions and weather-related disturbances that could affect food prices. The quarterly inflation forecast for FY27 is pegged at 4.0% for Q1, 4.4% for Q2, 5.2% for Q3, and 4.7% for Q4.

The West Asia Conflict's Shadow

Governor Malhotra repeatedly emphasized the potential impact of the West Asia conflict. Elevated prices for energy, fertilizers, and other commodities could act as a drag on domestic production. These factors threaten to widen India's current account deficit (CAD) and fiscal deficit. The RBI noted that while robust services exports and inward remittances are expected to keep the CAD at a sustainable level, the situation warrants close monitoring.

Widening Trade Deficit and Capital Flows

The RBI chief noted that India's trade deficit widened in the January-February period due to a rise in merchandise imports, particularly gold. On the capital flows front, the uncertain global environment has led to outflows from emerging markets. Foreign portfolio investment (FPI) recorded a net outflow of $1.4 billion in the current fiscal year up to April 6, following an outflow of $16.5 billion in the previous year.

Liquidity and Financial Stability

The central bank reiterated its commitment to ensuring adequate liquidity in the banking system to support growth. Economists expect the RBI to continue monitoring liquidity conditions closely and potentially use tools like Variable Rate Repo (VRRR) auctions to manage overnight rates. The overall policy mix is seen as neutral to marginally supportive for equities and fixed-income markets, prioritizing stability over premature policy actions.

Market Reaction and Path Forward

Indian financial markets reacted positively on the policy day, with the Sensex and Nifty surging. However, this was attributed to a combination of the RBI's calm and confident tone and external news regarding a potential ceasefire in West Asia, which eased oil prices. Experts and industry bodies have largely supported the RBI's decision, describing it as a balanced and prudent approach. The central bank's future moves will hinge on incoming data on inflation, growth, and the evolution of the global geopolitical landscape. The next MPC meeting is scheduled for June 3 to 5, 2026.