India’s cenbank keeps rates steady at 5.25%

India’s central bank on Friday held interest rates at 5.25% at a time when surging global energy costs have hammered its currency, while the Iran war risks accelerating inflation.

The Reserve Bank of India was widely expected to keep rates steady, as per economists polled by both Reuters and CNBC.

RBI raised its inflation projection for the financial year ending March 2027 by 50 basis points to 5.1%, while tempering economy growth forecast to 6.6% for the year, down from 6.9% projected earlier.

Governor Sanjay Malhotra said in his statement that “monetary policy has turned more cautious” as the global economic outlook remains clouded by the “geopolitical impasse” in the Middle East. He added that “sharply escalating energy prices and global supply chain disruptions continue to hinder economic activity.”

The conflict in the Middle East has posed a severe risk to the Indian economy, as energy supply disruptions have inflated the country’s import bill, piling pressure on the rupee that has already been hit by record foreign investor outflows.

In an attempt at shoring up the currency, Prime Minister Narendra Modi last month urged citizens to pause gold purchases, conserve fuel, and avoid overseas travel.

Policymakers have also taken action to defend the rupee, including selling dollars through state-run banks to stem its slide, according to a Reuters report. The government has also raised duties to curb demand for gold, a move aimed at conserving foreign exchange reserves.

Despite these measures, the rupee remains fragile. On a year-to-date basis, the rupee has weakened by over 6% against the dollar as per LSEG data, trading at 95.78 against the greenback.

The RBI faces a tough choice as the Iran war slows the world’s fastest-growing major economy, while inflation risks loom. In April, even before the government passed on the fuel price increases, India’s inflation rose for a sixth straight month to 3.48% from 3.40% in March.

Though inflation remains under the RBI target of 4% for now, India is expected to face weather-related disruptions due to El Nino this year that could cause crop shortages and push food prices higher. Food inflation, a key constituent of India’s consumer price index, rose 4.2% in April from 3.87% in March. 

As per a Reuters poll, India’s economy is expected to grow by 7.2% in January-March quarter, slowing from 7.8% in the previous quarter. The official quarterly GDP print will be released later on Friday.