India holds rates at 5.25% as war risks cloud growth and inflation outlook

Mumbai | EcoPulse24

India keeps interest rates unchanged amid rising external risks

The Reserve Bank of India held its benchmark repo rate unchanged at 5.25% for the second consecutive meeting, in line with expectations, as policymakers balance currency pressure, rising bond yields, and growing uncertainty linked to global geopolitical risks.

The decision reflects a cautious stance as the weakening rupee and higher global yields tighten financial conditions, while the ongoing Iran war introduces downside risks to growth alongside potential upside pressure on inflation.

Despite external risks, the RBI revised its GDP growth forecast for fiscal year 2025/26 upward to 7.6% from 7.4%, signaling confidence in domestic economic resilience, even as global conditions remain unstable.

For fiscal year 2026/27, growth is projected at 6.9%, with quarterly estimates showing a gradual slowdown from 6.8% in the first quarter to 6.7% in the second, indicating early signs of moderation in economic momentum.

Inflation is expected to remain contained near the central bank’s target, with projections at 4.6% for FY2026/27, including a gradual rise through the year, peaking at 5.2% in the third quarter before easing again, reflecting a balanced but fragile inflation outlook.

At the policy corridor level, the RBI maintained the Standing Deposit Facility rate at 5.0% and the Marginal Standing Facility rate at 5.50%, reinforcing its neutral stance while keeping flexibility for future adjustments.

India macro outlook and policy stance

The following snapshot highlights key projections and policy settings:

EcoPulse24 Analysis

India’s decision to hold rates reflects a strategic pause rather than a shift in policy direction, as the central bank navigates a complex macro environment shaped by both domestic resilience and external uncertainty. The upward revision in growth underscores the strength of internal demand, positioning India as one of the few major economies maintaining strong expansion despite global headwinds.

However, the external backdrop remains a key constraint. The Iran war introduces a dual risk dynamic, where energy price volatility can simultaneously pressure inflation and weaken growth through higher import costs and financial tightening. This creates a policy dilemma where tightening too early could suppress growth, while delaying action could allow inflation risks to build.

The weakening rupee adds another layer of complexity, as currency depreciation can amplify imported inflation, particularly in energy and commodities, linking India’s domestic outlook more closely to global market movements.

At a structural level, India is operating within a “controlled balance” regime, where growth remains strong but increasingly sensitive to external shocks. This positions monetary policy in a reactive mode, prioritizing stability over aggressive tightening or easing.

Looking ahead, the RBI’s neutral stance suggests that policy decisions will be highly data-dependent, with particular focus on energy prices, currency stability, and inflation trajectory. If global risks intensify, the central bank may be forced to adjust its stance sooner than currently projected.

Ultimately, India’s current policy path reflects a broader macro theme of “resilient growth under external pressure,” where domestic strength offsets global volatility, but does not fully insulate the economy from it.