RBI Likely To Hold Rates As 'Goldilocks' Phase Gives Way To Stress

India’s central bank is expected to keep interest rates on hold on Wednesday as policymakers assess the fallout from the war in Iran, which threatens the South Asian economy and has battered its currency and bond markets.

Instead, the focus is likely to be on calming financial markets, with assurances of readiness to support the weakening rupee and inject liquidity to keep bond yields in check, economists and traders said.

All but two of 71 economists in a March 23–26 Reuters poll forecast the Reserve Bank of India would keep the benchmark repo rate unchanged at 5.25%.

The RBI’s Monetary Policy Committee has cut rates by a cumulative 125 basis points in 2025 but paused at its February meeting. RBI Governor Sanjay Malhotra said in December that India’s economy was in a “Goldilocks” phase – combining strong growth with low inflation – giving the central bank room to keep policy loose for an extended period.

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That assessment has since been upended by the worst energy shock in decades.

"If the energy shock lingers, the growth drag could outstrip the price shock, reminiscent of the COVID-19 pandemic economy," said Pranjul Bhandari, chief India economist at HSBC, in an April 2 report.

The combination of weaker growth and rising inflation argues for a "neutral policy" stance that neither stimulates nor restrains demand, she said.

In contrast, financial markets have begun pricing in a more hawkish risk scenario. Since the Iran war began, traders in the overnight indexed swap (OIS) market have moved aggressively to price in the possibility of rate hikes, with one-month contracts reflecting expectations of a hike as early as this month.

Neeraj Gambhir, executive director for treasury, markets and wholesale banking products at Axis Bank, said swap rate pricing suggests investors assume the central bank may need to tighten policy to defend the currency. CALMING MARKETS Concerns over a widening current account deficit and foreign outflows have pushed the rupee to a record low past 95 per U.S. dollar.

The yield on India’s benchmark 10-year bond has risen to around 7.14%, its highest level in nearly two years, as investors fret over the hit to government finances from higher energy costs.

"We expect the RBI to continue injecting abundant liquidity into the system, ensuring easy financial conditions to help the economy tide over the shock," said Aastha Gudwani, chief India economist at Barclays.

Barclays expects the RBI to persist with bond purchases, short-term liquidity injections and longer-term foreign-exchange swap operations.

The central bank has taken steps to curb speculation in the forex markets.

Further measures to support the rupee – including a special forex swap window for oil companies or schemes to encourage inflows from non-resident Indians – also cannot be ruled out, Gudwani said, adding that defending the currency by raising interest rates would not be the central bank’s first line of defence.

Lower Growth, Higher Inflation

The RBI is due to present its first forecasts for growth and inflation for the 2026-27 financial year, and economists expect it to pare its previously optimistic outlook.

Much will hinge on the oil price assumptions underpinning those forecasts, with economists outlining a wide range of scenarios depending on how long energy prices stay elevated and supply disruptions persist.

HSBC estimates GDP growth would slow to 6.3% from an expected 7% this year if oil prices average $80 per barrel, and to 6% if prices remain closer to $100.

Inflation, which cooled to 3.2% in February, is seen averaging around 5% if oil prices stay near $100 a barrel.

"Rising inflation risks increase our conviction that the RBI will keep policy rates firmly on hold," said J.P. Morgan chief India economist Sajjid Chinoy in a March report.

"The bar for any rate hike is very high and would require a sustained supply shock that pushes headline inflation well above target for the foreseeable future,” he added.

India’s inflation target was reaffirmed last month at 4%, with a tolerance band of plus or minus 2 percentage points.

(Reporting by Jaspreet Kalra; additional reporting by Gopika Gopakumar; Editing by Sam Holmes)