RBI’s rate-setting panel is in step with other major central banks

The ceasefire in the West Asia conflict, announced just a little over an hour before US President Donald Trump’s deadline to “wipe out an entire civilisation” was to end (and, coincidently, just hours before RBI governor Sanjay Malhotra’s statement), brings only a temporary reprieve (of a fortnight).

It is far from clear whether the ceasefire will hold. More importantly, whether it will lead to lasting peace in a region that has been the scene of more wars than perhaps any other and is crucial to global energy security.

Unlike markets that tend to react like a cat on a hot tin roof—the Sensex shot up more than 3.6% in the first half hour of trade on Wednesday—central banks are expected to know better; and react in a more measured and mature fashion. RBI did just that. It kept its policy repo rate (at which it infuses liquidity into the banking system) unchanged at 5.25% and retained its neutral policy stance.

It can take comfort that it is not the only major central bank to have opted to keep its powder dry. Rather, it joins central banks like the US Federal Reserve, Bank of England, European Central Bank and Bank of Japan, all of which have preferred to wait and watch.

Ironically, the growth-inflation mix facing each of these central banks is different. In the US, growth continues to defy expectations, with the latest projection for the year at 2.2%, while annual inflation at 2.4% is above its target of 2%.

In contrast, growth in the UK is moribund—GDP expanded by just 0.1% in the October–December quarter, while inflation at 3% is above its target of 2%. In Japan, headline retail inflation stood at 3.2% while growth was just 1.1% (International Monetary Fund, 2025 estimates).

So what explains the fact that these central banks, all of which face disparate conditions, decided to hold rates at their March 2026 meetings?

Apart from the fact that inflation is above the target in all three, the common factor is that the outlook is so clouded by geopolitical uncertainty that it is simply not possible to make meaningful projections or take any action till the fog enveloping the world economy clears a little. In such a scenario, it is always more prudent to wait and watch.

Likewise with RBI and its rate-setting committee. The war, in particular the virtual closure of the Strait of Hormuz, has disrupted not just the global oil market, but thanks to spillovers, a host of other sectors, notably gas, fertilizers, insurance, transport and logistics.

Our overwhelming import dependence for energy means second-order inflation effects cannot be ignored. Though retail inflation may seem benign at 3.2% in February and the March number may also post within the target range of 2-6%, it is only a matter of time before inflation ticks up, driven by supply disruptions and a weaker rupee.

For now, the pass-through to retail consumers has been suppressed by the government’s decision to lower excise and customs duties on a host of petroleum products. But that is, at best, a breather.

In governor Malhotra’s words, “The unprecedented challenge for the global economy—higher prices and lower global growth—[means] monetary policy faces a difficult trade-off—anchoring inflation expectations through policy tightening while minimizing its impact on growth.” The “intensity and duration of the conflict in West Asia and the resultant damage to energy and other infrastructure add risk to the inflation and growth outlooks.”

Faced with this conundrum, the MPC expects growth to fall from 7.6% in 2025-26 to 6.9% in 2026-27, a decline of 0.7 percentage points. Inflation, on the other hand, is expected to more than double—yes, you read that right—from 2.1% last fiscal year to 4.6% this fiscal.

“Headline inflation,” notes the statement, “remains contained and below the target, but upside risks to the inflation outlook have increased, driven by increased energy price pressures and probable weather disturbances affecting food prices.” But with core inflation (i.e. inflation stripped of food and fuel prices) projected at 4.4% in 2026-27 and real interest rates perilously close to zero in the third quarter, inflation is clearly a bigger cause for concern than growth at the moment.

Indeed, the MPC argues that “the fundamentals of the Indian economy are on a stronger footing, providing it with greater resilience to withstand shocks now than in the past.” Whether they are good enough to deal with this latest shock—which the International Energy Agency describes as the ‘worst energy crisis in history’—remains to be seen.

Yet, given that the economy is facing a supply shock and monetary policy is ill-equipped to deal with supply shocks, one cannot but agree with the MPC. “It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook.”

The author is a senior journalist and a former central banker.