RBI to wait and watch on rate action even as crude oil prices ease

Prices of the Indian basket of crude oil have eased to the $86 level in June but traffic from the Strait of Hormuz is still at a trickle of the pre-West Asia war levels. Economists have warned that energy shocks could have a significant and wide impact on various sectors of the Indian economy in the rest of the fiscal.  

The Reserve Bank of India (RBI) might now prefer to wait and watch on future rate action. In early June, economists had forecast the central bank to start hiking interest rates sooner than expected.  

The monetary policy committee (MPC) will continue to be watchful if inflation was getting generalised and building into expectations, RBI Governor Sanjay Malhotra has said. Thus the central bank wants to understand if inflation pressures will be transitory or permanent, on the economy. 

Malhotra signalled this in an interview to ET Now television channel saying: "It is premature to talk about an interest rate hike at this stage. There is elevated uncertainty," he said, particularly on inflation, to the television channel.   

In the recent monetary policy on June 5, he had said that the RBI will not be reactive at each stage. "It is not advisable to take action for every small deviation from the target. This can have consequences which can be disproportionate for growth,” he had said. 

The RBI, in 2025 cut rates four times but has kept rates on hold at 5.15% since December 5, 2025. The next monetary policy decision is set to be announced on August 5. 

Rating agency Crisil’s senior director and principal economist Dipti Deshpande said these are supply side shocks. But even as oil prices ease, a lot of these sectors will pass on the pressure to retail prices (customers) while others could see a crimping of producer margins. In both cases, GDP growth will slow down this fiscal. 

Talking about how a sustained energy shock can cripple the industry, the Crisil report released on June 17 says; “Overall, sectors facing high impact of cost pressures contribute around 17% of GVA. They are likely to attempt passing on cost increases to retail prices wherever consumer demand conditions permit, otherwise a hit to margins is expected.”  

The report goes on to say that core input sectors such as land transport, mining (particularly iron and metal ores) agriculture, chemical products (which includes fertilisers, paints and man-made fibres), rubber and plastic products are particularly exposed to energy price shocks. “An increase in energy costs is therefore likely to push up prices of these core inputs. As a result, producers not only face direct and immediate cost pressures from crude, petroleum, and gas, but also indirect second-order pressures from rising prices in these core inputs,” the report says. 

The second round indirect impact of rising energy prices would be felt in metal products, pharmaceuticals, construction, electronics, manufactured/ processed food, transport manufacturing, machinery and textiles. 

Deshpande said there is uncertainty on whether energy prices will stay below $90-95 per barrel. “Issues such as negotiation setbacks between US and Iran, intermediate clashes could keep oil prices elevated,” she told Fortune India. 

Because these are supply side pressures, the RBI will not want to move interest rates too much,” she said. 

Deshpande added that RBI will want to see if oil prices will sustain at these lower levels; seeing the impact of El Niño or whether the government will be able to manage the situation. Also if these two price pressures go up, it remains to be seen if they will enter household inflation expectation.  

On June 5, the bi-monthly data of the RBI’s Inflation Expectations Survey of Households (IESH) for May 2026 showed that the current median inflation perception of households rose by 60 basis points to 7.8% from 7.2% in March. 

Crisil forecasts no interest rate hikes in calendar year 2026 and one in early 2027. 

YES Bank’s chief economist Indranil Pan said that the pressures on the government to pass through fuel prices to pump heads has gone. Also the inflation front is “docile” he said, which could mean that there is no immediate need for an interest rate change. 

“There could be some pressure seen on oilseed, pulses and tomato prices. But what will be critical is if rainfall fails to the level that reservoir levels are not built up,” Pan told Fortune India. He forecasts that the real impact of El Niño will be seen in FY28 and not FY27. 

This week, Union minister for Agriculture and Farmers’ Welfare Shivraj Singh Chouhan told the media that he had held a high-level meeting with state agriculture ministers and officials to study the El Niño situation. Chouhan said the rainfall so far was around 43% below normal and 315 districts were vulnerable. 

Pan felt that the real wages of the rural sector will be weaker, if there is crop failure and this could result in demand erosion.