RBI warns of growth risks from West Asia tensions, commentary turns cautious

The Reserve Bank of India on Wednesday kept the policy repo rate unchanged at 5.25 per cent, while warning that the ongoing West Asia conflict could weigh on India’s economic growth in the coming months.

Announcing the first monetary policy decision for FY27, Sanjay Malhotra said that although India’s macroeconomic fundamentals remain strong, rising geopolitical tensions and global uncertainty pose a risk to the growth outlook.

“High frequency indicators till February of this year suggest the continuation of strong momentum in economic activity. The West Asia conflict, however, is likely to impede this growth,” Malhotra said during the policy announcement.

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India enters global turbulence from a position of strength

Malhotra said India has entered the current phase of global uncertainty from a relatively stronger economic position compared with previous crisis episodes and several other economies.

He noted that the conflict in West Asia intensified in March, expanding the conflict zone and worsening global uncertainty.

“Conditions turned adverse in March with the widening of the conflict zone and its intensification. The fundamentals of the Indian economy are on a stronger footing at the current juncture than it was in previous crisis episodes as well as relative to many other economies, providing it with greater resilience to withstand shocks,” he said.

The RBI governor also flagged the risk of disruption in the Strait of Hormuz, a key global energy shipping route, which could impact economic growth and inflation if supply flows are affected.

Inflation risks rise due to energy prices

While headline inflation remains broadly contained, Malhotra warned that upside risks have increased, particularly due to higher global energy prices and potential weather-related pressures on food inflation.

Rising geopolitical tensions have increased volatility in oil markets and pushed inflationary pressures higher across several economies.

Despite these challenges, the RBI said India remains relatively well positioned to navigate global shocks.

Global financial markets see volatility

The RBI also highlighted that heightened geopolitical uncertainty has led to increased volatility in global financial markets.

Safe-haven flows have strengthened the US dollar, putting depreciation pressure on currencies of several major economies.

At the same time, commodity prices such as metals and gold have moderated, while financial markets globally have witnessed sharp swings amid rising uncertainty.

Repo rate unchanged, policy stance remains neutral

The Monetary Policy Committee (MPC) met on 6 June, 7 June, and briefly on Wednesday morning to deliberate on the policy decision.

After assessing macroeconomic and financial developments, the committee unanimously voted to keep the repo rate unchanged at 5.25 per cent.

“The MPC voted unanimously to keep the policy repo rate unchanged under the liquidity adjustment facility at 5.25 per cent,” Malhotra said.

The committee also decided to maintain the policy stance as neutral, indicating flexibility depending on evolving macroeconomic conditions.

RBI projects FY27 inflation at 4.6 per cent

The RBI projected consumer price inflation for FY27 at 4.6 per cent, while noting risks from energy prices and weather conditions.

Quarterly projections are as follows:

• Q1 FY27: 4.0 per cent
• Q2 FY27: 4.4 per cent
• Q3 FY27: 5.2 per cent
• Q4 FY27: 4.7 per cent

GDP growth forecast at 6.9 per cent for FY27

The central bank projected India’s GDP growth for FY27 at 6.9 per cent, though it trimmed projections for the first half of the year.

Quarterly projections are:

• Q1 FY27: 6.8 per cent (cut from 6.9 per cent)
• Q2 FY27: 6.7 per cent (cut from 7 per cent)
• Q3 FY27: 7.0 per cent
• Q4 FY27: 7.2 per cent

The downward revision reflects uncertainty arising from global geopolitical tensions and potential disruptions to trade and energy supply.

Key policy rates after the latest RBI decision

Following the policy announcement, key rates stand at:

• Repo rate: 5.25 per cent
• Standing Deposit Facility (SDF): 5.00 per cent
• Marginal Standing Facility (MSF): 5.50 per cent
• Bank Rate: 5.50 per cent
• Cash Reserve Ratio (CRR): 3 per cent

The RBI said it will continue to closely monitor global developments, particularly geopolitical risks and commodity price movements, while calibrating future policy actions.