MUMBAI: Caught between a slowing economy and the risk of a new price spiral due to conflict in West Asia, the Reserve Bank of India on Friday left the repo rate unchanged at 5.25%, cut growth forecasts for FY27 and raised inflation expectations, while signaling that the threat of inflation could expand economy-wide beyond fuel and commodities if supply-side pressures persist.Governor Sanjay Malhotra stopped short of tightening policy but left little doubt that the central bank is concerned about what it calls “mainstreaming” inflation. While rising oil prices and disruptions to supply chains have already begun to increase costs, the MPC preferred to wait for more clarity on the duration and intensity of the conflict before acting.
“Although the impact of cost pressures is becoming clear, higher energy and other input prices coupled with disruptions are likely to impact economic activity,” the governor said.The Monetary Policy Committee voted unanimously to keep the repo rate unchanged at 5.25% and maintain a neutral stance.The decision reflects the central bank’s attempt to balance inflation risks with emerging signs of moderation in economic activity.The Reserve Bank of India lowered its FY27 growth forecast to 6.6% from 6.9% expected earlier, citing deteriorating global environment. Quarterly growth is now expected to reach 6.6% in the first quarter, 6.3% in the second quarter, 6.5% in the third quarter, and 6.8% in the fourth quarter.
This reduction represents the Reserve Bank of India’s recognition that the economic repercussions resulting from the conflict are no longer limited to energy markets.“Global supply chain disruptions, volatility in global financial markets, and weather-related shocks continue to pose downside risks to the domestic growth outlook,” Governor Malhotra said.Inflation expectations have worsened even more sharply. The Reserve Bank of India raised its CPI inflation forecast for FY2027 to 5.1% from 4.6%, a 50 basis point revision largely reflecting the rise in crude oil prices.
The Indian basket price has averaged around $110 per barrel over the past two months, much higher than the $85 assumption used in the policy review in April. Malhotra hinted at political action if prices remain stable.The combination of weak monsoons and El Nino increases food price inflation. The Reserve Bank of India now expects inflation to reach 4.2% in the first quarter, 5.1% in the second quarter, 5.9% in the third quarter, and 5.4% in the fourth quarter, with core inflation reaching 4.7%.For now, Mint Road is still on fire. But if input cost inflation spreads and expectations tighten, supporting growth could combat inflation. India enters this turmoil with stronger fundamentals than in previous oil shocks, and stands ready to recalibrate policy as conditions evolve, the Reserve Bank of India said.