West Asia War: Here’s why RBI may keep benchmark interest rate on hold in April MPC meet
Rising inflation, with the outlook further clouded by the conflict in West Asia and the pressure on rupee will weigh on the monetary policy committee's actions in April.
- Mar 13, 2026,
- Updated Mar 13, 2026 12:21 PM IST
Borrowers hoping to get some more respite in the coming months with another interest rate cut, could be disappointed. Inflation is rising again in India and the conflict in West Asia has led to a spike in crude oil prices and a shortage of LPG cylinders, clouding the near-term outlook. The rupee is also falling, adding in to the Reserve Bank of India’s concerns. As it battles on several fronts, the central bank may prefer to leave interest rates unchanged in the next monetary policy committee (MPC) meeting in April and monitor the situation, say experts.
In the current easing cycle, the MPC has so far reduced the benchmark repo rate by 125 basis points (1.25 percentage points) to 5.25% from 6.5%, as consumer price index (CPI)-based inflation cooled, opening up room for the RBI to give growth a boost.
However, things are changing fast. From around 0.3% in October, retail inflation rose to 3.21% in February. Though still lower than the central bank’s target of 4% (plus or minus 2%), crude oil prices have accelerated to $100 barrel amid the West Asian conflict and LPG supplies have been hit too, casting a shadow on the near-term outlook. Should the conflict prolong beyond a few weeks, there may be serious concern for economies like India, which are heavily dependent on energy imports.
In its previous meeting in February, before Israel and the US launched an attack against Iran, the MPC left the repo rate unchanged at 5.25%, while maintaining a neutral stance. It noted that while external headwinds had intensified, successful implementation of trade deals augured well for economic outlook. Overall, it had noted that the near-term inflation and growth outlook had remained positive.
The outlook is far more cloudy now amid the conflict. A prolonged war may further tighten oil and gas supplies. Already gas shortage is affecting various industries from fertilisers to tiles.
The uncertainties and their potential impact may need monitoring in the coming weeks and perhaps months, should the war continue and, hence, the MPC may prefer to wait and watch.
Due to exchange rate fluctuations and external shocks like supply chain disruptions, imported inflation was already at 5.7% for February and is expected to increase considerably, said Soumya Kanti Ghosh, Group Chief Economic Adviser of State Bank of India.
He also pointed to the recent global weather forecasts that predicted possible El Nino conditions later this year. This could also affect inflation in the later part of the year, should the monsoon be affected.
Importantly, the MPC will be mindful of the pressure on the rupee, which has slipped past the 92 level against the US dollar.
“While rate easing in April is off the table, the real dilemma for the RBI will be about drawing the line between forex intervention and tolerance," said Madhavi Arora, Chief Economist of Emkay Global Financial Services.
Letting the rupee depreciate freely to absorb the shock is not an option in times of stress, as speculation can quickly lead to a slippery slope for the currency, she said. But “sustained and significant unsterilised spot intervention would drain domestic liquidity at a time when banking liquidity is seasonally tight.”
Hitesh Suvarna of JM Financial Institutional Securities is also expecting a “prolonged pause” in rate action by the RBI. “The supply disruption in the Strait of Hormuz will be the key variable to monitor as its continued disruption would have second-order effects on the inflation print,” said Suvarna, who feels the RBI will continue to focus on ensuring ample liquidity in the system.
Rajani Sinha, Chief Economist of CareEdge Ratings, also expects the RBI to leave rates unchanged in April, while closely monitoring the geopolitical situation. “If average crude oil prices remain elevated at $100 per barrel or higher, taking both direct and indirect impact into account, inflation could rise above 5%,” Sinha noted.
As per an RBI research paper last July, a 10% increase in global crude prices could raise headline inflation by around 20 basis points.
In its base-case scenario, assuming Brent crude averages between $60-70 per barrel, Sinha expects inflation in FY27 to average around 4.3%.
Borrowers hoping to get some more respite in the coming months with another interest rate cut, could be disappointed. Inflation is rising again in India and the conflict in West Asia has led to a spike in crude oil prices and a shortage of LPG cylinders, clouding the near-term outlook. The rupee is also falling, adding in to the Reserve Bank of India’s concerns. As it battles on several fronts, the central bank may prefer to leave interest rates unchanged in the next monetary policy committee (MPC) meeting in April and monitor the situation, say experts.
In the current easing cycle, the MPC has so far reduced the benchmark repo rate by 125 basis points (1.25 percentage points) to 5.25% from 6.5%, as consumer price index (CPI)-based inflation cooled, opening up room for the RBI to give growth a boost.
However, things are changing fast. From around 0.3% in October, retail inflation rose to 3.21% in February. Though still lower than the central bank’s target of 4% (plus or minus 2%), crude oil prices have accelerated to $100 barrel amid the West Asian conflict and LPG supplies have been hit too, casting a shadow on the near-term outlook. Should the conflict prolong beyond a few weeks, there may be serious concern for economies like India, which are heavily dependent on energy imports.
In its previous meeting in February, before Israel and the US launched an attack against Iran, the MPC left the repo rate unchanged at 5.25%, while maintaining a neutral stance. It noted that while external headwinds had intensified, successful implementation of trade deals augured well for economic outlook. Overall, it had noted that the near-term inflation and growth outlook had remained positive.
The outlook is far more cloudy now amid the conflict. A prolonged war may further tighten oil and gas supplies. Already gas shortage is affecting various industries from fertilisers to tiles.
The uncertainties and their potential impact may need monitoring in the coming weeks and perhaps months, should the war continue and, hence, the MPC may prefer to wait and watch.
Due to exchange rate fluctuations and external shocks like supply chain disruptions, imported inflation was already at 5.7% for February and is expected to increase considerably, said Soumya Kanti Ghosh, Group Chief Economic Adviser of State Bank of India.
He also pointed to the recent global weather forecasts that predicted possible El Nino conditions later this year. This could also affect inflation in the later part of the year, should the monsoon be affected.
Importantly, the MPC will be mindful of the pressure on the rupee, which has slipped past the 92 level against the US dollar.
“While rate easing in April is off the table, the real dilemma for the RBI will be about drawing the line between forex intervention and tolerance," said Madhavi Arora, Chief Economist of Emkay Global Financial Services.
Letting the rupee depreciate freely to absorb the shock is not an option in times of stress, as speculation can quickly lead to a slippery slope for the currency, she said. But “sustained and significant unsterilised spot intervention would drain domestic liquidity at a time when banking liquidity is seasonally tight.”
Hitesh Suvarna of JM Financial Institutional Securities is also expecting a “prolonged pause” in rate action by the RBI. “The supply disruption in the Strait of Hormuz will be the key variable to monitor as its continued disruption would have second-order effects on the inflation print,” said Suvarna, who feels the RBI will continue to focus on ensuring ample liquidity in the system.
Rajani Sinha, Chief Economist of CareEdge Ratings, also expects the RBI to leave rates unchanged in April, while closely monitoring the geopolitical situation. “If average crude oil prices remain elevated at $100 per barrel or higher, taking both direct and indirect impact into account, inflation could rise above 5%,” Sinha noted.
As per an RBI research paper last July, a 10% increase in global crude prices could raise headline inflation by around 20 basis points.
In its base-case scenario, assuming Brent crude averages between $60-70 per barrel, Sinha expects inflation in FY27 to average around 4.3%.