A pedestrian passes by the Indian rupee symbol installed outside the Reserve Bank of India (RBI) building in Mumbai on May 17, 2026.
Punit Paranjpe | AFP | Getty Images
India’s central bank on Friday kept interest rates unchanged at 5.25% amid rising global energy costs that weakened the Indian currency and the Iran war that risks accelerating inflation.
The Reserve Bank of India was widely expected to keep interest rates unchanged, according to a Reuters/CNBC poll of economists.
The RBI has raised its inflation forecast for the fiscal year ending March 2027 by 50 basis points to 5.1%, while lowering its economic growth forecast for the year to 6.6% from 6.9% previously forecast.
Governor Sanjay Malhotra said in a statement that “monetary policy has become more cautious” as the global economic outlook remains uncertain due to the “geopolitical impasse” in the Middle East. “Suddenly rising energy prices and disruptions to global supply chains continue to hamper economic activity,” he said.
Krishna Bhimavarapu, Asia-Pacific economist at State Street Global Advisors, told CNBC that the RBI is preparing markets for a possible rate hike in August with a “hawkish stance.”
The Middle East conflict poses serious risks to the Indian economy. Energy supply disruptions have pushed up import bills and put pressure on the rupee, already hit by record foreign investor outflows.
In a bid to shore up the currency, Prime Minister Narendra Modi last month urged people to suspend gold purchases, conserve fuel and avoid international travel.
According to a report by Reuters, policymakers are also taking steps to protect the rupee, including selling dollars through state-run banks to stem the rupee’s decline. The government also raised tariffs to curb gold demand with the aim of preserving foreign exchange reserves.
Despite these measures, the rupee remains weak. The rupee has fallen more than 6% against the dollar since the start of the year, trading at $95.78, according to LSEG data.
With the Iran war slowing the world’s fastest-growing major economies and inflation risks looming, central banks face difficult choices. Even in April, before the government passed on fuel price increases, India’s inflation rate rose for the sixth consecutive month to 3.48% from 3.40% in March.
Inflation is currently below the RBI’s target of 4%, but India is expected to face weather-related disruptions this year due to El Niño, which could cause crop shortages and push up food prices. Food inflation, a key component of India’s consumer price index, rose 4.2% in April from 3.87% in March.
India’s economy is expected to grow 7.2% in the January-March quarter, slowing from 7.8% in the previous quarter, according to a Reuters poll. The official quarterly GDP printout is expected to be released later Friday.
“The biggest risk for India in terms of inflation is a delay in the southwest monsoon, which is likely to be an El Niño event,” Bhimavarapu said.
India’s 10-year government bond yield fell by about 4 basis points to 6.958%. nifty 50 The stock price index rose 0.22%.
