RBI flags Iran conflict as key risk, holds repo rate at 5.25 per cent

MUMBAI: The Reserve Bank of India has sounded a clear warning on rising geopolitical tensions involving Iran, flagging them as a major threat to India’s economic stability even as it held the repo rate steady at 5.25 per cent on 8 April.

At its latest meeting, the Monetary Policy Committee signalled a shift in tone from comfort to caution. The central bank indicated that the relatively benign “Goldilocks” phase of steady growth and moderate inflation may be giving way to a more defensive stance.

Reserve Bank of India governor Sanjay Malhotra said the risks from global tensions are no longer distant concerns but immediate pressures shaping inflation, currency stability and growth.

The biggest worry is imported inflation. With crude oil prices climbing past $100 a barrel amid the conflict, India’s heavy reliance on imports is once again in focus. Higher fuel costs are expected to ripple through the economy, pushing up prices of goods and services. The RBI has already nudged its FY27 inflation forecast up to 4.6 per cent.

Another pressure point lies in supply chains. The Strait of Hormuz, a vital artery for global energy trade, has emerged as a potential chokepoint. Any disruption here could hit India’s energy security hard, given that a significant share of its crude and cooking gas flows through this route. Rising tanker costs and rerouting risks are also quietly adding to inflation.

Currency volatility is adding to the unease. A global risk-off sentiment has triggered capital outflows from emerging markets, pushing the rupee to record lows near 95 against the dollar. The RBI has stepped in with measures to curb speculation and stabilise the currency, but pressures remain elevated.

External balances are also under strain. A surge in import bills alongside softer exports has widened the trade deficit sharply, putting additional stress on the current account. February’s merchandise trade gap of over $27 billion underscores the scale of the challenge.

On the fiscal front, recent fuel duty cuts aimed at shielding consumers could dent government finances by up to Rs 1.75 lakh crore. At the same time, growth expectations are being trimmed. Goldman Sachs has already lowered India’s 2026 growth forecast to 5.9 per cent, reflecting the broader global uncertainty.

While there are tentative signs of a ceasefire linked to diplomatic efforts, including signals associated with Donald Trump, the RBI is not taking any chances. Its messaging is clear: the focus has shifted from boosting growth to protecting stability.

For now, interest rates remain unchanged, but the road ahead looks less predictable. If tensions persist, the possibility of future rate hikes cannot be ruled out, signalling that the era of easy money may be on pause until global risks cool.