RBI wait-and-watch: repo 5.25% as West Asia shocks

What the RBI is signalling now

Reserve Bank of India Governor Sanjay Malhotra has said the central bank is in a “wait-and-watch mode” as the West Asia conflict creates a supply shock that can lift imported inflation. Speaking at Princeton University in the US on April 18, Malhotra argued that the immediate shock matters less than the risk of second-round effects that can embed inflation into the general price level. The RBI, he said, is avoiding firm commitments on the future path of monetary policy in an uncertain environment. The governor’s remarks come as disruptions around the Strait of Hormuz keep energy, fertiliser and broader commodity prices in focus. The policy emphasis, as described in his speech and subsequent commentary around the Monetary Policy Committee (MPC) decision, is to remain data-dependent and continually reassess the balance of risks.

Why West Asia matters for India’s trade and remittances

Malhotra laid out the direct economic linkages that amplify India’s exposure to the region. West Asia contributes about one-sixth of India’s exports and one-fifth of its imports, according to the governor. It also accounts for half of India’s crude oil imports and about two-fifths of fertiliser imports. Inward remittances are another major channel, with the region contributing nearly two-fifths, as per his statement. These proportions make the conflict more than a distant geopolitical event for India, because supply disruptions can quickly translate into higher import bills and price pressures. The RBI has flagged that such shocks can spill over beyond energy into agriculture and other input-heavy sectors.

Supply shock vs second-round effects: the RBI’s core concern

The RBI governor described “second-round effects” as the real concern. In his framing, the appropriate monetary policy response to a supply shock is to look through the first-round impact to the extent it does not feed into broader inflation dynamics. The risk rises if supply chain disruptions persist for long, because an initial supply shock can become embedded in the general price level. Preventing that entrenchment is where monetary policy has a primary role, he said, working through inflation expectations rather than “blunt demand compression.” This approach matters because demand-compressing responses can weigh on growth even when inflation is being driven by supply constraints.

The RBI’s current stance: neutral, data-dependent, no promises

Malhotra said it is important to be agile and nimble and avoid firm commitments on the future path of policy. The RBI’s approach, he said, has been to become more data dependent and to continuously reassess the balance of risks. He also noted that the RBI has been maintaining a neutral stance for the last few policy cycles, which preserves flexibility as inflation-growth dynamics evolve. In the MPC decision referenced in the provided material, the committee voted unanimously to keep the policy repo rate unchanged at 5.25% and continue with a neutral stance. The neutral setting is being positioned as an option value, giving the RBI room to respond if inflation expectations deteriorate or growth weakens materially.

What the MPC decision and forecasts say

Alongside the hold on rates, the RBI’s projections point to a more difficult trade-off than earlier. The RBI now expects the Indian economy to grow at 6.9% in 2026-27, with risks tilted to the downside, as cited in the provided text. Inflation projection for 2026-27 is stated at 4.6%, with risks tilted to the upside. A Monetary Policy Report referenced in the content projects 6.6% GDP growth for 2027-28 assuming crude oil at $15 per barrel. External benchmarks also appeared in the coverage, including a World Bank South Asia outlook that projects 6.6% and 7% GDP growth for India in 2026-27 and 2027-28, respectively. The thread running through these figures is that geopolitical risk is forcing policymakers to keep buffers ready rather than lean on forward guidance.

External stability: rupee moves, reserves, and FX intervention

The RBI also addressed currency market volatility linked to the conflict. Malhotra defended intervention in foreign exchange markets while stressing the RBI has not committed to an “indefensible peg” on the rupee. The rupee was reported to have depreciated over 4% following the conflict’s eruption in March. Foreign exchange reserves were cited at $110 billion in one section of the provided material, covering more than 11 months of imports. Another section cited reserves at $197.1 billion with roughly 11 months of import cover. Separately, the RBI’s position on intervention was described as smoothing “excessive and disruptive volatility” without targeting a specific level or band, consistent with a market-determined exchange rate framework.

On-the-ground responses: oil, gas, and import diversification

The governor also referred to operational and policy responses aimed at limiting shortages. During the current crisis, domestic production of oil and gas is being ramped up, and sources of imports are being diversified, according to his remarks. While he said there is no shortage of oil given reserves maintained by India, he noted there is some rationing of gas for industrial purposes. He also stated that oil marketing companies and the government have absorbed price pressures in oil, while passing on some price pressure on gas to consumers. These details help explain why the RBI is distinguishing between a price shock and a sustained inflation process.

Key facts at a glance

Why this matters for markets and households

The RBI’s messaging is aimed at preventing temporary supply shocks from morphing into persistent inflation through expectations and pricing behaviour. For households, the key transmission channel is energy-related costs and the pass-through into transport, cooking fuel, and fertiliser-linked food prices. For businesses, higher input costs, freight, and insurance can squeeze margins and delay production if key imports become constrained. For investors, the focus is on how long supply-chain disruptions persist, because the RBI has indicated that persistence is what raises the risk of second-round effects. The central bank’s choice to avoid firm commitments also signals that upcoming data will likely shape policy more than preset guidance.

Conclusion

Governor Sanjay Malhotra’s core point is that the West Asia conflict is a supply shock that becomes dangerous if it lasts long enough to embed itself in inflation expectations. The RBI is keeping the repo rate at 5.25% and the stance neutral while staying explicitly data-dependent and monitoring risks from energy markets, trade channels, and financial conditions. The next signal for markets will come from how inflation and growth data evolve as shipping and energy flows around the Strait of Hormuz stabilise or face renewed disruption.