India's central bank left its benchmark repo rate unchanged and retained its neutral policy stance, while lowering its growth forecast and raising its inflation outlook as policymakers assessed the economic impact of the prolonged conflict in the Middle East.
The Reserve Bank of India kept the repo rate at 5.25%, in line with forecasts, according to a Friday press release.
The central bank lowered its real gross domestic product growth forecast for fiscal 2027 to 6.6% and raised its inflation projection to 5.1%.
"The adverse implications of the extended disruption in supply chains and elevated energy prices are reflected in the moderation of growth and increase in inflation projections from the April policy," the Monetary Policy Committee said.
The RBI projected GDP growth of 6.6% in the first quarter, 6.3% in the second quarter, 6.5% in the third quarter, and 6.8% in the fourth quarter of fiscal 2027.
While domestic demand has remained resilient, the central bank said the economic impact of the conflict is becoming increasingly visible.
"While the economy has withstood the conflict spillovers with limited impact so far, the strains are increasingly becoming visible," Governor Sanjay Malhotra said in his speech.
The RBI said fuel prices have risen 7.4% for petrol and 8.4% for diesel since May, adding direct inflationary pressure and increasing the risk of broader pass-through from higher energy and commodity costs.
For fiscal 2027, the central bank projected inflation at 4.2% in the first quarter, 5.1% in the second, 5.9% in the third, and 5.4% in the fourth.
The central bank warned that the inflation outlook remains vulnerable to supply-chain disruptions, higher commodity prices, and a below-normal southwest monsoon forecast.
The committee chose to leave rates unchanged despite rising inflation risks, citing uncertainty over the duration and economic impact of the conflict in the Middle East, the statement said.
"Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity to emerge. Accordingly, the MPC voted to keep the policy rate unchanged," Malhotra said.
He added that policymakers would remain vigilant to signs of supply-side pressures feeding into broader prices and inflation expectations.
Economists said the Reserve Bank of India may still need to tighten policy later this year if higher fuel and commodity costs feed through more broadly into consumer prices.
"We expect 50 basis points of rate hike beginning in October," Upasna Bhardwaj, a senior economist at Kotak Mahindra Bank, was quoted as saying by Bloomberg News.
"However, the extent of pass-through of supply side pressures would not rule out August policy also being live," she added.