The Reserve Bank of India (RBI) decided to keep its key policy rate unchanged at 5.25% on Wednesday, as the central bank evaluates the economic fallout from the ongoing U.S.-Iran war and its impact on inflation and growth prospects [1][2]. This decision leaves India's key policy rate at a near four-year low, with the central bank citing uncertainty stemming from the conflict and rising energy prices as major factors influencing its stance [1].
According to RBI Governor Sanjay Malhotra, the intensity and duration of the conflict, along with the resulting damage to energy and other infrastructure, pose significant risks to both inflation and growth in India [2]. India's consumer inflation increased for the fourth consecutive month, reaching 3.21% in February, up from 2.75% in January [2]. While Malhotra noted that the food price outlook remains 'comfortable in the near term,' he warned that the surge in energy prices due to the Middle East conflict is a risk to inflation [2].
India's economy has demonstrated robust growth, remaining the world's fastest-growing large economy with a 7.8% expansion in the December quarter, surpassing expectations [2]. However, Chief Economic Advisor V. Anantha Nageswaran cautioned last month that the growth forecast of 7.0%–7.4% for the financial year ending March 2027 faces 'considerable downside' risk due to rising energy costs and supply-chain disruptions linked to the war [2]. Nageswaran highlighted that the Middle East conflict could disrupt supplies of key commodities such as oil, gas, and fertilizers, increase import prices, and raise logistics costs, all of which would impact both growth and inflation [2].
The conflict, which began on February 28 following U.S. and Israeli strikes on Iran, has disrupted the movement of goods through the Strait of Hormuz—a vital waterway carrying 20% of global oil—leading to higher energy and freight costs and straining supply chains [2]. In a temporary relief, the U.S. and Iran agreed to a ceasefire earlier in the day, with Tehran stating that safe passage of ships would be 'possible' for the next two weeks in coordination with its armed forces [2].
Market indicators reflect growing concerns, as the HSBC flash Purchasing Managers' Index compiled by S&P Global showed that India's private sector activity in March slowed to its lowest level since October 2022. Companies surveyed attributed the slowdown to the Middle East war, unstable market conditions, and inflationary pressures, which have 'dampened growth' [2].
CONCLUSION
The RBI's decision to maintain its policy rate at 5.25% underscores the central bank's cautious approach amid heightened geopolitical risks and inflationary pressures. While India's economy remains resilient, the ongoing U.S.-Iran conflict and associated supply chain disruptions present significant downside risks to both growth and inflation. Market sentiment remains cautious as policymakers and businesses monitor the evolving situation.