Rbi Keeps Repo Rate Unchanged at 5.25% on Back of Iran Crisis

Mumbai, April 8: The Reserve Bank of India (RBI) on Wednesday decided to hold key rates steady, with global risks overhanging economic prospects. In its first policy announcement of the financial year, the RBI kept the repo rate unchanged at 5.25 per cent, as it adopted a “wait and watch” stance against the backdrop of geopolitical uncertainties.

RBI Governor Sanjay Malhotra said the Monetary Policy Committee (MPC) has voted unanimously in favour of status quo, and retains neutral stance to keep options open as the situation evolves.

In its policy statement, the RBI said inflation is under control at the moment, but building up gradually. The RBI said headline inflation has remained below target in recent months, with prints at 2.7 per cent in January and 3.2 per cent in February. RBI Governor Malhotra said the CPI inflation projected at 4.6 pc for current fiscal. The RBI observed that food inflation remained in deflation for several months till December, which have eased pressure on households.

Core Inflation Muted

The RBI also said core inflation has been muted at around 3.7 per cent, indicating limited underlying price pressures. However, it added, rising global energy prices due to the Middle East conflict, add to uncertainty. The RBI also flagged risks from supply chain disruptions and higher freight costs, as well as the risk of second-round effects if inflationary impulses feed through to the economy.

On growth, the RBI said India’s growth story is expected to remain resilient in the face of global volatility. The RBI projected real GDP growth at 6.9 per cent for the current financial year, after an estimated 7.6 per cent expansion in the last fiscal. It said consumption will continue to be supported by a strong rural economy and a buoyant services sector.

Inflation Pressure Building

On the inflation front, the RBI said while inflation pressures are building up gradually, so far there are no signs of sustained or second-round effects. However, the RBI warned that ongoing Iran-related geopolitical tensions—even as some ceasefire has been agreed for now—pose downside risks to the economy, given potential impact on input costs and global demand.

The RBI also provided detailed inflation projections, reflecting a cautious outlook. The RBI expects CPI inflation to average 4.6 per cent this year, with quarterly estimates of 4 per cent in Q1, 4.4 per cent in Q2, 5.2 per cent in Q3, and 4.7 per cent in Q4. The RBI projected core inflation at 4.4 per cent.

The RBI noted that food prices remain stable for now due to strong rabi output, adequate reservoir levels, and sufficient buffer stocks. However, the RBI warned that possible El Niño conditions could disrupt weather patterns and push food prices higher.

Agriculture Sector Robust

On the rural economy, the RBI said the agricultural sector will likely remain robust. It said rural demand has been resilient so far and should strengthen further going ahead, as conditions in the rural economy remain favourable and with water reservoirs at healthy levels. The RBI added urban consumption will also remain supported by a buoyant services sector. The RBI also noted that the labour market remains healthy, which should support income growth and spending. It also said infrastructure spending and private investment will also provide support.

In terms of the external sector, the RBI noted mixed trends. It said merchandise exports could come under pressure from higher shipping costs and other supply chain disruptions and diversion of trade routes. However, it also said recent trade deals could provide some support. It also said services exports are expected to remain robust, despite the global uncertainty.

Fuel Prices

On petrol and diesel prices, the RBI said while international crude prices have gone up on account of geopolitical tensions, the retail prices of petrol and diesel in India have remained unchanged so far. It also noted that a few fuel-related items have already seen price hikes as producers have partially passed on higher global costs.

In its explanation of the policy decision, the RBI said the decision to keep the repo rate unchanged at 5.25 per cent reflects MPC’s view that the economy is currently facing a supply shock rather than demand-driven inflation. The RBI reiterated the uncertainties around the Iran conflict, financial volatility in global markets and weather-related risks call for a cautious approach. It added it would remain vigilant and take action as required to ensure stability and keep its policy options open.

Source: https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=62514