RBI Stays on Hold, but Signals Flexibility in a Shifting Risk Landscape

A lot can change in a short period of time. And between April 6 and April 8, it did. When the MPC started their deliberations for the April meeting, the global backdrop was significantly worse than when they concluded their discussions this morning. The two-week ceasefire announced indeed offers a huge relief, easing the tense backdrop for monetary policy. 

Setting policy in such uncertain times (especially given the gravity and frequency of how quickly narratives change) is no easy task and required the RBI to rightly manage expectations.

As telegraphed, the RBI MPC unanimously retained its policy repo rate at 5.25% and kept the stance unchanged at ‘neutral’.

The Governor's address and policy statement underscored that "the intensity and the duration of the conflict in West Asia and the resultant damage to the energy and other infrastructure add risk to the inflation and growth outlooks”. Given the considerable uncertainty around the trajectory of international energy prices and its potential drag on economic activity, emanating from supply chain disruptions, the MPC chose a judicious pause on the policy repo rate. 

The MPC expects 2026-27 CPI inflation to average 4.6% , with risks to the upside. For the first time, the MPC also gave a forecast for core CPI inflation, at 4.4%  for 2026-27. In the post policy press conference, while the RBI clarified that it will continue to target headline CPI inflation (at the target and within the band), the composition of inflation is also important to monitor. The Governor was quick to highlight that underlying price pressures seem to be muted when precious metals are excluded from core CPI. 

While the MPC appeared cautious on the volatility and passthrough of international commodity prices, it seemed to draw comfort from robust food supply prospects and contained core CPI inflation (ex-precious metals). It sees upside risks from elevated energy prices due to the West Asia conflict, and the risk of El Nino affecting the southwest monsoon.

The MPC forecasts 2026-27 GDP growth at 6.9%, with risks tilted to the downside. The policy statement cited multiple factors that could adversely affect growth. While supply chain disruptions are an obvious channel, it also highlighted volatility in global financial markets spilling over to domestic conditions, and merchandise exports weighed down by shipping disruptions and the rise in transportation costs. The RBI still expects domestic demand to sustain the momentum seen in the previous fiscal year, most notably in services and manufacturing, driven by GST rationalization, corporate balance sheets and rising capacity utilization. 

The RBI’s inflation forecast is on the higher side, and was the most hawkish signal in today’s policy. However, as the RBI MPC seems convinced that higher inflation is a supply shock outcome, and not likely to respond in any hurry via rate hikes, especially as the two-week ceasefire offers relief.

The policy statement noted that, “the economy is confronted with a supply shock. It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook. Accordingly, the MPC voted to keep the policy rate unchanged even as it remains vigilant, closely monitoring incoming information and assessing the balance of risks. The MPC also decided to continue with the neutral stance, retaining the flexibility to respond judiciously to incoming information.”

While the rate decision and associated comments were neutral, the post-policy conference call offered the following key insights: 

• The recently announced regulatory measures to support the currency by discouraging speculative position building are specific to the current context/episode and will not be there 'forever'. The RBI leadership went to great lengths to clarify that there is no change in the RBI's stance; it remains committed to a further deepening and widening of the FX market, assisting internationalization of the rupee. Hedging activity for foreign investors will continue to operate as usual and the RBI will see how markets respond to these measures.
• The RBI Governor remarked that real rates are high and not low (currently at 2%). The governor also said that the 'neutral' stance gives them the flexibility to act on either side, but it is quite possible that low rates continue for a long time.
• The RBI reiterated that to help banks navigate the ongoing uncertainty, it has allowed WACR to be below SDF (still within the band) and that the RBI will provide sufficient, proactive and preemptive liquidity to the system. 

So, until there is a durable threat to the RBI's inflation target, the RBI MPC may choose to look through upcoming higher inflation prints in the wake of a supply shock. The RBI has erred on the side of caution by estimating CPI inflation at 4.6% year on year. 

Superimposing the optimal real rate onto this would imply an imminent rate hike.

However, the ongoing conflict has not only yielded a price shock, but also a growth shock, and in times such as these, the optimal real rates tend to be lower. Accordingly, the MPC is expected to keep policy rates unchanged at 5.25% in 2026.