RBI holds repo at 5.25% as oil shocks lift inflation

Repo rate stays unchanged, but risks rise

The Reserve Bank of India (RBI) kept the repo rate unchanged at 5.25%, as policymakers flagged fresh risks from higher crude oil prices and supply disruptions linked to the conflict in West Asia. RBI Governor Sanjay Malhotra warned that the geopolitical situation is lifting oil prices and disrupting supplies, adding uncertainty to the inflation path. In response to these pressures, the central bank cut its growth forecast and raised its inflation outlook for the current financial year. While the repo decision signals continuity in near-term policy rates, the updated projections show the RBI is factoring in sharper cost pressures than before.

What triggered the RBI’s shift in outlook

The RBI’s revised outlook is largely tied to the sharp move in crude oil prices and the knock-on effects on domestic prices. Malhotra said the central bank had earlier assumed average crude oil prices of around $15 per barrel in its previous policy review. He stated that this assumption is no longer valid after the recent jump in global prices. According to Malhotra, international crude oil prices for the Indian basket have averaged around $110 per barrel during the last two months. He also indicated that the average oil price for the year could be substantially higher than what was assumed earlier.

Inflation forecast raised to 5.1% for the year

Reflecting higher cost pressures, the RBI increased its consumer price inflation projection for the current financial year to an average of 5.1%. The RBI also published quarter-wise inflation projections:

• Q1: 4.2%
• Q2: 5.1%
• Q3: 5.9%
• Q4: 5.4%

This profile implies inflation is expected to firm up as the year progresses, consistent with the central bank’s warning that oil-driven pressures are beginning to show up in the macro outlook.

Oil prices, supply disruptions, and pass-through risks

The RBI’s emphasis on West Asia reflects the role of crude oil in India’s inflation dynamics, especially when disruptions lift prices and complicate supply chains. Malhotra’s comments point to a scenario where oil prices remain above prior assumptions, forcing the RBI to reassess baseline projections. The narrative in the policy communication suggests the central bank is watching both the price level and the durability of the shock. A sustained rise in crude can affect fuel-linked costs and a broader set of inputs, shaping headline inflation outcomes.

HSBC view: no hike expected, but tone could turn hawkish

Market expectations in the report suggest the RBI was widely expected to keep rates unchanged, but the external environment could still push the policy narrative in a more cautious direction. Pranjul Bhandari, HSBC’s Chief India Economist and Macro Strategist, said the central bank could strike a more hawkish tone as higher oil prices and a weaker rupee complicate the inflation outlook. Bhandari also said HSBC’s base case still assumes there will be no formal repo rate hike.

The $15 baseline and the alternative $15 scenario

At its previous policy review, the RBI assumed crude oil would average around $15 per barrel in its baseline projections. It also provided an alternative scenario where oil averaged $15 per barrel. Bhandari expects that this higher oil assumption could now become the RBI’s base case. She said that if $15 becomes the base case, inflation projections would rise immediately.

This matters because the assumed crude path is a key input into the RBI’s published inflation forecast. Moving the baseline higher signals a more cautious stance even if the repo rate itself remains unchanged.

Monetary Policy Report: higher crude and rupee assumptions for FY27

Separately, the RBI’s Monetary Policy Report released on April 8 raised baseline assumptions for crude and the exchange rate. The central bank projected crude oil prices to average $15 per barrel in FY27, up from an earlier assumption of $10 per barrel during H2FY26. The RBI also revised its exchange rate assumption, expecting the rupee to average 94 per US dollar in FY27, compared with 88 projected earlier for H2FY26. The RBI said the baseline assumption for crude oil price has been taken at $15 per barrel for FY27 and $15 per barrel for FY28, in line with average Brent future prices.

FY26 assumption and the US-Iran ceasefire context

In another update linked to the April 8 communication, Malhotra said the RBI assumed an average crude oil price of $15 per barrel for FY 2025-26, in line with its CPI inflation projection of 4.6%. He added that the crude oil price assumption for FY 2027-28 is $15 per barrel. The report noted that this projection followed the announcement of a temporary ceasefire between the United States and Iran, which eased prices.

Key numbers at a glance

Market impact: what the projections signal

The RBI’s decision to hold rates while lifting inflation projections highlights a policy challenge: cost pressures are rising even as the rate stance remains unchanged. The explicit reference to crude averaging $110 per barrel in recent months underscores the near-term inflation risk from energy prices. The shift in baseline assumptions in the Monetary Policy Report, including a weaker rupee assumption of 94 per dollar for FY27, reinforces that the RBI is preparing for a more testing external environment.

Bhandari’s expectation of no formal repo hike, paired with the possibility of a more hawkish tone, captures the likely near-term policy messaging. The RBI’s own use of alternative oil scenarios, including the previously cited $15 per barrel case, shows how quickly inflation projections can adjust if the assumed crude path moves higher.

Conclusion

The RBI kept the repo rate unchanged at 5.25%, but its updated projections point to a more cautious macro outlook as oil prices rise and supply disruptions persist. With inflation now projected at 5.1% for the year and quarterly inflation expected to peak at 5.9% in Q3, future policy communication will likely stay focused on crude price assumptions and their pass-through to prices.