RBI governor signals cautious, data-led approach as West Asia risks mount
Mumbai: India’s central bank is opting for caution as escalating risks from West Asia cloud its outlook, with governor Sanjay Malhotra signalling a data-driven approach to keep monetary policy flexible to respond to evolving inflation-growth dynamics.
“In uncertain times such as this, it is important to be agile and nimble, maintain a broad policy stance, and avoid making firm commitments on the future path of policy,” Malhotra said in an address at New Jersey-based Princeton University on 18 April. A copy of the speech was uploaded on RBI’s website on Monday evening.
“In such circumstances, our broad approach has been to be even more data dependent and to continuously reassess the balance of risks,” Malhotra said.
“We are therefore in wait-and-watch mode now,” he added, pointing to the neutral stance that the Reserve Bank of India (RBI) has maintained over the previous few policy cycles.
Even as it kept the repo rate at 5.25% in its latest policy on 8 April, the RBI highlighted upside risks to inflation due to a possible increase in energy prices, and probable weather disturbances. It also flagged more downside risks to growth in the case of prolonged disruptions in West Asia and said that the external shock has “clouded the growth outlook”.
The April 2026 pause was the second consecutive instance of the central bank keeping the key policy rate unchanged at its bi-monthly monetary policy decision. Prior to that, RBI had cut the repo rate by a cumulative 125 basis points, in multiple tranches between February and December 2025.
While the central bank pegged real GDP growth for FY26 at 7.6%, it projected a lower 6.9% for the current fiscal year (FY27). Here, growth in Q1 is projected at 6.8%, Q2 (6.7%), Q3 (7%), and Q4 at 7.2%.
In his 18 April speech, Malhotra highlighted that the present crisis “particularly impacts” India as West Asia contributes about one-sixth of our exports, one-fifth of our imports, half of our crude oil imports, two-fifths of our fertilizers imports and almost two-fifths of our inward remittances.
“The appropriate monetary policy response to such a supply shock is to look through the first-round effect to the extent that it does not feed into second-round dynamics. Second-round effects are the real concern,” he said.
Such second-round effects can materialise if the supply chain disruptions continue for long, he said, adding that in such a scenario, what began as a supply shock can become embedded in the general price level.
“Preventing this entrenchment is where monetary policy has a primary role to play — through its influence on inflation expectations rather than through blunt demand compression,” he said.
India’s consumer price index (CPI)-based headline inflation rose to 3.4% in March 2026 from 3.2% and 2.7% in February and January, respectively. RBI has projected CPI inflation for FY27 at 4.6%. Core inflation for the year has been pegged at 4.4%.
Unlike countries such as the US and New Zealand, which have a dual growth-inflation mandate, the RBI has an explicit single mandate of price stability under the flexible inflation targeting (FIT) framework, which was adopted in 2016. The framework mandates headline inflation within a band of 2-6%.
Since adopting the FIT framework, India’s average headline inflation dropped to 4.7% between September 2016 and December 2025, from 7.4% between April 2012 to August 2016. Headline inflation volatility has come down to 1.7% from 2.4% over the same period, and has allowed India to navigate both internal as well as external supply shocks, Malhotra said.
Policy measures to ramp up oil and gas production, diversify sources of imports, and rationing of gas for industrial purposes have also helped absorb supply shocks, he said, adding that oil market companies and the government have absorbed much of the price pressures in oil while passing on some price pressures on gas to consumers.
Combined with fiscal consolidation, these steps have ensured that our financial system is healthy and resilient, and is supporting economic development.
“The resilience of the Indian economy is not by chance. It is because of the robust policy frameworks that have been successfully developed. It is due to the strong and credible institutions that have been assiduously built. It is on account of the various reforms undertaken steadily over the years. It rests on a foundation of stability and inclusion,” he said.
