They said the Reserve Bank of India’s move to hit the “pause” button on rates could change quickly if inflation rears its head again. Continued outflows from India’s growing assets and the resulting weakening of the rupee – arguably Asia’s worst performing currency this year – could force the RBI to act on rates sooner than previously.
“Chances of a long pause that the market had prepared before this crisis have definitely receded. Of course, the RBI will not make a call immediately,” said Andranil Pan, chief economist at Yes Bank. “It is fair to assume that there will be no action in April – or even June – but the chances of a reduction are almost non-existent now.”
Global benchmark Brent crude rose to a four-year high of $120 a barrel on Monday on worries of supply disruptions, but has since fallen to $90 after the International Energy Agency announced a historic release of emergency reserves. Prices are still high at around $73 per barrel before the US-Israeli coalition attacked Iran on February 27.
The Monetary Policy Committee (MPC) will announce its decision on benchmark rates on April 9. Of course, recent inflation prints — and broader trends in economic activity — will have an impact on price action, economists said.
The latest inflation reading was at 2.75% in January. The February reading will be released on Thursday (March 12). Consumer inflation has trended below the central bank’s rate stabilization target of 4% since January 2025, reaching a low of 0.25% in October 2025, mainly helped by a favorable base effect for food prices.
But economists worry that the effect of the fundamentals will soon be lost due to past spikes in inflation. When this is combined with expected supply-side constraints, prices should tighten. Moreover, the central bank has already offered four rate cuts of 125 basis points to 5.25% from January 2025, leaving little room for further cuts.
Little room to maneuver
“Apart from inflationary pressures from the Iran war, the banking system itself is ill-equipped to handle another downturn as deposit rates cannot go any lower,” said Madan Sabnavis, chief economist at Bank of Baroda. “Food inflation, which was helped by the base effect, will not get this benefit in early April. This coupled with issues related to LPG supply, air fares and possible El Nino conditions will lead to higher inflation.”
The World Meteorological Organization (WMO) has predicted El Nino weather conditions in the second half of 2026, leading to higher temperatures and possible monsoons in India, which will further affect food prices.
Subnavis said he expects inflation to pick up and go beyond 4% in the first half of the next fiscal year, ruling out the possibility of further rate cuts.
Rising oil prices and the risk of a widening deficit have also accelerated the outflow of foreign portfolios from India. Foreign funds have withdrawn `35,808 crore from Indian markets so far this calendar year, reflecting the weakness of the rupee, which fell to an all-time low of `92.35 per dollar on Monday. A weak rupee means the RBI cannot cut rates any further.
“The situation is ongoing. However, the balance of risks has shifted away from the extended pause/recent price cut and the pause and increase. It is premature to see an increase in a barrel. But if oil prices remain at $90-100 for a year and global price hikes begin, the MPC management sector should be considered soon.” Anubhoti Sahai, Head, India Economic Research, Standard Chartered.
