Reserve Bank of India (RBI) signage in Mumbai, India, Friday, April 5, 2024.
Dheeraj Singh | Bloomberg | Getty Images
India’s central bank on Wednesday kept its policy rate unchanged at 5.25%, warning that the Iran war has heightened inflation concerns while also warning of risks to economic growth.
Economists polled by Reuters had expected interest rates to remain unchanged.
Reserve Bank of India Governor Sanjay Malhotra said in a statement that the intensity and duration of the conflict, and the resulting damage to energy and other infrastructure, poses “risks to (India’s) inflation and growth.”
The RBI has revised India’s real GDP growth rate downward from 6.9% to 6.8% for the April-June quarter, and to 6.7% for the July-September quarter from the previous forecast of 7.0%.
Malhotra said “higher energy and other commodity prices coupled with the supply shock from the Strait of Hormuz disruption” will weigh on domestic production in the fiscal year ending March 2027.
India’s consumer inflation rate rose for the fourth consecutive month to 3.21% in February from 2.75% in the previous month. Malhotra said the country’s food price outlook remained “comfortable in the short term”, but added that rising energy prices due to Middle East conflicts posed a risk of inflation.
The country has experienced rapid growth and remains the world’s fastest-growing large economy, expanding at a better-than-expected 7.8% in the quarter to December, but fears of war with Iran loom large over the economy.
India’s chief economic advisor V. Ananta Nageswaran also warned last month that growth forecasts of 7.0% to 7.4% for the fiscal year ending March 2027 faced “significant downside risks” due to war-related rises in energy costs and supply chain disruptions.
Nageswaran said the Middle East conflict would disrupt the supply of key commodities such as oil, gas and fertilizers, raising import prices and raising logistics costs, impacting both growth and inflation.
The conflict, which began on February 28 after US and Israeli attacks on Iran, has disrupted the movement of goods through the Strait of Hormuz, a vital waterway that carries 20% of the world’s oil, raising energy and cargo costs and straining supply chains.
In a temporary relief, the U.S. and Iran agreed to a ceasefire earlier in the day, and Tehran, in coordination with its military, said safe navigation for ships was “possible” for the next two weeks.
Signaling concerns about growth, the HSBC Preliminary Purchasing Managers’ Business Index compiled by S&P Global showed India’s private sector activity slowed in March to its lowest level since October 2022. Companies surveyed indicated that wars in the Middle East, volatile market conditions and inflationary pressures had “slowed growth.”
Anubhuti Sahai, head of Indian economic research at Standard Chartered Bank, said that even if oil prices remained high, inflation was unlikely to rise above 6%, but the “downside risks to growth” were greater, adding that a rate hike was unlikely.
However, in a scenario where other central banks raise key policy rates and there is “significant pressure on the rupee,” the central bank could “use policy rates as a means to manage external sector risks,” he said.
