Mumbai: The Reserve Bank on Wednesday, as expected, kept interest rates unchanged amid hopes of a global recovery on the back of a ceasefire in the six-week-long US/Israel-Iran conflict.
The policy decision comes as a month-and-a-half-long conflict in West Asia has disrupted energy supplies, driven up crude oil prices, and created fiscal and inflationary pressures for import-dependent nations like India.
This is the first monetary policy review after the government announced a fresh inflation target for the RBI last month. The government has asked the RBI to maintain retail inflation at 4 per cent with a margin of 2 per cent on either side for another five years ending March 2031.
India, the report cautioned, is not insulated from these developments. “Rupee is already hovering above 93 per dollar and crude oil is adamant above $100/bbl, resulting in jump in imported inflation,” it said, adding that this could be exacerbated by a possible Super El Nino, impacting inflation dynamics.
On the domestic front, SBI Research underlined rising inflationary pressures. “Imported inflation… is already at 5.4%… and is expected to increase considerably further,” the report stated, warning that CPI inflation could “indicate more than 4.5% inflation for the next 3 quarters.”
Given the volatile backdrop, the RBI is expected to tread cautiously in its communication. “As the first policy since the starting of war, RBI would be much careful in communicating its position,” the report added.
The report also flagged external sector concerns, including pressure on the rupee and capital outflows. It noted that FY26 saw the “highest FII outflows at $16.6 billion since 1991,” while the balance of payments (BoP) is projected to remain in deficit in FY27.
On policy measures, SBI suggested that beyond rate action, the central bank may focus on liquidity and market functioning. “What is currently required is focus on correcting market microstructure,” it said, adding that the RBI could explore “Operation Twist” to manage yields.
Further, recent regulatory steps to stabilise the rupee may pose challenges for lenders. “Some of the norms may pose operational challenges for Banks,” the report observed, particularly in relation to curbs on speculative positions in currency markets.
SBI Research concludes that while growth considerations remain relevant, the current environment of geopolitical tensions, currency volatility, and inflation risks justifies a pause in policy rates.
