A pedestrian walks past an Indian rupee sign outside the Reserve Bank of India (RBI) building in Mumbai on May 17, 2026.
Punit Paranjpe | Afp | Getty Images
India’s central bank on Friday held interest rates at 5.25% at a time when rising global energy costs have taken their toll, while the Iran war threatens to accelerate inflation.
The Reserve Bank of India was widely expected to keep rates steady, according to economists polled by Reuters and CNBC.
The RBI raised its inflation target for the fiscal year ending March 2027 by 50 basis points to 5.1%, while lowering its forecast for economic growth to 6.6% this year, down from 6.9% previously expected.
Governor Sanjay Malhotra in his statement said that “monetary policy has become more cautious” as the global economic situation is still overshadowed by the “secular conflict” in the Middle East. He added that “spiking electricity prices and disruptions in the supply of basic services around the world continue to affect the economy.”
Krishna Bhimavarapu, APAC economist at State Street Global Advisors, told CNBC that the RBI in its “hawkish stance,” is preparing the market for a rate hike in August.
The conflict in the Middle East has posed a major risk to the Indian economy, as disruptions in energy supply have pushed up the import bill, putting pressure on the rupee already battered by record foreign investor outflows.
In an effort to reduce the cost, Prime Minister Narendra Modi last month urged citizens to stop buying gold, save fuel, and avoid traveling abroad.
Policymakers have also taken steps to protect the rupee, including selling dollars through state-owned banks to stem its slide, according to a Reuters report. The government also proposed curbing the demand for gold, a move aimed at saving foreign exchange.
Despite these measures, the rupee remains weak. In the year to date, the rupee has weakened more than 6% against the dollar according to LSEG data, trading at 95.78 against the greenback.
The RBI faces tough choices as the war in Iran slows the world’s fastest growing economy, while inflation is at risk. In April, even before the government agreed to hike fuel prices, inflation in India rose for the sixth consecutive month to 3.48% from 3.40% in March.
While inflation remains below the RBI’s target of 4% for now, India is expected to face weather-related disruptions due to El Nino this year which could cause crop shortages and increase food prices. Food inflation, a key component of India’s consumer price index, rose 4.2% in April from 3.87% in March.
According to a Reuters poll, India’s economy is expected to grow 7.2% in the January-March quarter, down from 7.8% in the previous quarter. The official quarterly GDP print will be released later on Friday.
“India’s biggest risk in terms of inflation is the delay in the southwest monsoon, which is likely to have an El Nino,” Bhimavarapu said.
