After that, the February policy, the last of FY26 and the first after the Union Budget, was a non-event. The Monetary Policy Committee (MPC), RBI’s six-member rate-setting body, kept the policy rate unchanged at 5.25 per cent, and the stance “neutral”.
What can we expect from next week’s policy, the first of the current financial year? This will be Malhotra’s eighth monetary policy, and probably his toughest. Before pressing pause in February this year, between February and December 2025, there was a 125-bps rate cut – the most aggressive easing since 2019.
After the December rate cut, Malhotra spoke about the “real Goldilocks period” of the Indian economy. In February, his take was that the economy was in the same “sweet spot, or even better”, as underlying inflation continued to be benign, while the growth impulse was getting stronger.
He made the comment on February 6, at the end of the three-day MPC meeting. Three weeks down, on February 28, the United States and Israel launched coordinated airstrikes on Iran. The war continues. The West Asia crisis has changed everything. It has raised the upside risks to inflation and downside risks to growth. This is not for India alone.
A March 26 report on growth and inflation projections by the Organisation for Economic Cooperation and Development, a forum of 38 democracies with market economies, sums up the conflict’s impact succinctly. It estimates global GDP growth to slow from 3.2 per cent in 2025 to 2.9 per cent in 2026, driven by higher tariffs, policy uncertainty, and moderated investment.
It also expects inflation in G20 countries to increase to 4 per cent in 2026 from an estimated 3.4 per cent. Some major central banks, such as the Bank of England, European Central Bank and US Federal Reserve, have revised their inflation outlooks upward.
S&P Global Ratings’ Asia-Pacific economic commentary on March 25 was that growth in the region should hold up, with tech-oriented economies and sectors outperforming. However, it added that higher energy prices were a drag, and prolonged energy market disruption a key risk. In countries such as India, Indonesia, Japan, Malaysia, and Thailand, higher energy prices will force greater spending on subsidies, straining fiscal positions.
Going by its projection, there’s no room left to ease monetary policy, and rising energy-driven inflation and pressures of currency depreciation will keep Asia-Pacific central banks cautious.
Meanwhile, Moody's Ratings has slashed India's economic growth estimate for FY27 to 6 per cent from 6.8 percent, stating that the ongoing conflict in West Asia will moderate growth momentum and raise inflation risks.
Against this backdrop, let’s look at what has changed for India since the last monetary policy.
On February 6, a dollar fetched Rs 90.66. Last week, the rupee closed at 93.1 to a dollar, after hitting 95.125 on March 30. The 10-year bond yield, which was at 6.736 per cent on February 6, closed at 7.13 per cent last week – the highest since May 2024, when the policy rate was 6.5 per cent.
During this time, the US 10-year bond yield has risen from 4.206 per cent to 4.36 per cent, and Brent crude has galloped from $68.5 a gallon to $108.61.
To curb currency volatility and speculation, leading to sharp rupee depreciation, the RBI has capped banks’ daily net open rupee position in the onshore deliverable market at $100 million, effective April 10. Earlier, it allowed positions up to 25 per cent of a bank’s total capital.
It did not stop there. The central bank also barred banks from offering rupee non-deliverable forwards to resident and non-resident clients. Now companies cannot rebook cancelled forward contracts.
While there are conflicting views on the impact of these twin measures, they make the RBI’s concerns about the external environment abundantly clear. Rising crude prices and a depreciating rupee impact inflation significantly.
The market will keenly watch how the RBI views the currency movement. As of February, its forward book has risen to $77.7 billion, and it could rise further in March. This will affect the RBI’s ability to use buy-sell swaps to sterilise its spot dollar selling.
The forward book represents the net outstanding contracts the RBI has entered into through buy-sell swap or selling foreign currency (dollars) at future dates. A "negative" or "short" forward book means the RBI has sold dollars forward to stabilise the rupee without immediately depleting forex reserves.
A depreciating currency and a likely rise in inflation call for a rate hike. Right? Not exactly. Not at this point. This is because simultaneously, rising input costs are set to affect economic activities. This means growth will be hurt. There is significant risk to growth from the West Asia crisis, even though India will continue to remain the world’s largest-growing major economy.
In the last policy, the RBI raised its real gross domestic product (GDP) growth projections for the first quarter of FY27 from 6.7 per cent to 6.9 per cent, and for the second quarter from 6.8 per cent to 7 per cent.
It also raised its retail inflation projections at that time. The consumer price index (CPI)-based inflation rate for FY26 was estimated at 2.1 per cent, with the fourth-quarter rate at 3.2 per cent. The CPI-based inflation rate for the first quarter of FY27 was projected at 4 per cent, and for the second quarter at 4.2 per cent.
The central bank is expected to release the full-year GDP growth and CPI-based inflation projections next week. It will not be an easy task in these uncertain times. Expect the RBI to pare growth projection and raise inflation estimates.
What will be the estimates? That will depend on how long the crisis persists and how severe it is. Most analysts expect an average CPI inflation of under 5 per cent in FY27. Even if it crosses that level, it should be within the RBI’s flexible inflation target, which is capped at 6 per cent. In the best-case scenario, growth should hover just below 7 per cent. And, in the worst case? That’s anybody’s guess at this point.
On the fiscal side, there isn’t much leeway to support growth. The government has already cut excise duty on petrol and diesel, and exempted Customs duties on select petrochemical products. Following this, the fiscal deficit is expected to rise. The onus is on the RBI to ensure liquidity and credit flow.
Announcing the last policy, Malhotra had said the growth-inflation dynamics (then) called for no action. The RBI will wait and watch how things unfold. At this point, too, the growth-inflation dynamics, though a bit tilted, call for no action. Even if growth slides a bit, it will be from a relatively higher base, but the inflation genie, which was bottled, can spread its wings.
The MPC’s decision on policy rate and its stance may remain the same, even though the context has changed. It will be a no-action policy. And, the RBI will make liquidity available for productive purposes.