RBI MPC set to keep rates on hold; needs to assuage war-rattled markets

With the West Asia war escalating into its second month and inflationary pressures rising, the Reserve Bank of India (RBI) is likely to be on a wait and watch mode, keeping interest rates unchanged at its upcoming April 8 monetary policy meeting. The repo rate is at 5.25%, last reduced in December 2025.

However, the messaging from the RBI governor Sanjay Malhotra will be more critical. With crude oil prices and the rupee volatile, the central bank will need to signal that it will be ready to take all necessary action whenever necessary. Its urgent policy measures in March/April in the foreign exchange market to reduce volatility of the rupee were indicative of this.

"While keeping interest rates unchanged in April, we expect the RBI to highlight that they would be ready to take measures, as required. All options will be on the table,” says Anubhuti Sahay, head of India Economics Research at Standard Chartered Bank.

Sakshi Gupta, principal economist at HDFC Bank, also expects the RBI to “wait and watch how the West Asia war unfolds. “There is too much uncertainty and too many moving pieces,” she told Fortune India.

"They could show caution, but we hope they are not too hawkish. But they must not forget that India's macro-economic conditions were quite positive, before the war began.” Prior to the war, inflation in India was below the tolerance band and RBI called the outlook ”benign”. In late February, the Ministry of Finance had projected growth in FY27 to range between 7% to 7.4%. But the chief economic advisor to the government, has now cautioned that “there is considerable downside to this number.”

In the previous February 6, 2026, MPC meeting, RBI noted that high frequency indicators suggest continuation of the strong growth momentum in Q3FY26 and beyond. “With the signing of a landmark trade deal with the European Union and the US trade agreement in sight, growth momentum is likely to be sustained for a longer period,” the committee had said, in the statement on its website.

Re-assessing inflation and growth

But the escalating war means that the RBI will need to re-assess both inflation and growth targets for FY27. Since the start of the war, the Indian basket of crude oil has risen 69% to $124 per bbl as of April 2, 2026. US and India’s 10-year bond yields have also risen in the same period, raising the borrowing costs for corporates and hurting their earnings. Indian equities have fallen between 14-15% in 2026.

Bank of Baroda’s economist Sonal Badhan, in a note to clients on April 1 said she expected the RBI to keep the repo rate steady at 5.25%. “The stance is also expected to be maintained at neutral, as the central bank is likely to remain vigilant about the evolving situation. The tone will be more cautious than hawkish,” she said.

Badhan said the current volatile global macro-economic environment means that this could be the end of the rate cut cycle, and RBI will now remain on a prolonged pause. “However, there may be measures announced to support liquidity and the rupee,” she said.

Badhan added that the impact of war on growth and inflation will become clearer in the next 3-4 months. “RBI is likely to then take a call on the direction of its rate trajectory. If inflation overshoots its upper band of 4% tolerance (6%) then there will be a chance of rate hike towards the end of the year.”

The rupee has been sharply volatile in the past few weeks, ranging between 91 to 95 to the dollar in the month of March. It is quite likely, that in the April policy, measures can be announced to support liquidity and the rupee, the economists said.