With the energy shock rippling through the global economy, we expect the Reserve Bank of India to hold its policy repo rate unchanged at 5.25% at the end of its three-day meeting on April 8.
While the Indian economy entered the year with significant momentum, the exogeneous shock resulting from the war in Iran has effectively closed the window for further accommodation.
In our view, a pause would be the prudent path to avoid hitting domestic investment and consumption at a time when the economy is already facing a growth hit from energy costs.
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We anticipate that Governor Sanjay Malhotra will emphasize that policy responses to the shock must avoid amplifying growth risks and prevent a de-anchoring of inflation expectations as the Monetary Policy Committee continues to be guided by incoming data.
The language used to describe the persistence of the shock will be critical for market interpretation ahead of the June meeting.
The macro context
As recently as February, India’s macroeconomic position remained robust, characterized by gross domestic product rising at a strong 7.4% and the consumer price index remaining under control at 3.21%, well below the central bank’s 4% target.
Helping drive this strength was the 125 basis points of cumulative easing already delivered between February 2025 and December 2025.
But that position has deteriorated rapidly. The rapid ascent of Brent crude prices from approximately $70 per barrel in late February to above $105 by late March will materially alter India’s inflation, balance of payments and policy outlook.
For an economy importing nearly 85% of its crude, every $10 increase in oil prices adds approximately $13 billion to $14 billion to the annual import bill.
The rupee has depreciated by close to 4% since the conflict began, approaching the 95-mark against the dollar, while foreign portfolio investors pulled more than $13 billion from the domestic markets in March alone.
The 10-year government bond yield has risen to 7%, a 20-month high that poses an upward risk to borrowing costs.
The Reserve Bank of India has responded through multiple channels to contain financial volatility rather than inflation directly. Measures have included selling more than $30 billion of foreign exchange reserves, tightening banks’ daily net open foreign exchange positions, and restricting access to offshore non-deliverable forward contracts.
At the same time, the government has sought to cushion households from the immediate inflationary impact by cutting excise duties on petrol and diesel by 10 rupees per liter, effective March 27.
While this reduction blunts the impact of higher oil prices on inflation, it creates pressure on the fiscal deficit target of 4.3% of GDP.
The path forward
The primary variable for the economy is the duration of the energy shock. To determine the policy outlook, we evaluate a number of scenarios:
- Oil averages near $100: In the first scenario, with Brent crude averaging near $100 per barrel through the second quarter, GDP growth moderates to a range between 6.7% and 6.9%, while CPI inflation rises to 4.0%-4.6%. Under these conditions, the repo rate is likely to remain at 5.25% through most of the fiscal year, with possible cuts in the second half should oil prices retreat.
- Oil averages between $100 to $110: In the second scenario, with Brent crude sustained between $100 and $110 for multiple months, CPI inflation rises to 4.8%-5.5%, while GDP growth slows further to 6.2%-6.7%. In this environment, the implied path rate shifts to a hike of 25 to 50 basis points, depending on the evidence of second-round effects.
- Oil averages between $110 and $125: In the third scenario, with Brent crude sustained between $110 and $125, CPI inflation could rise to a range between 5.5% and 6.5%, while GDP growth falls to between 5.8% and 6.2%. This would most likely lead the RBI into a tightening cycle, with the repo rate potentially breaching 6.00%.
- Oil exceeds $125: If the conflict escalates and supply disruptions deepen so that Brent trades above $125 for a sustained period, CPI inflation could breach 6.5%, while GDP growth would fall below 5.8%. The RBI would most likely pursue aggressive monetary tightening, with the repo rate potentially reaching 6.50%.
Our forecast
Our base case for the April meeting remains that the easing cycle is paused, not terminated.
Should Brent crude average near $110 per barrel into late April, the rupee continue to depreciate, or elevated energy prices bleed into the core inflation rate or inflation expectations, we would expect the MPC to abandon its neutral stance altogether.
