RBI Expected to Hold Rates as 'Goldilocks' Phase Gives Way to Iran War Stress

Key Points

• RBI expected to keep interest rates unchanged at April 8 policy meeting
• Iran war has ended India's 'Goldilocks' economic phase of strong growth with low inflation
• Energy supply shock threatens to lift inflation while potentially dragging growth
• HSBC and J.P. Morgan economists flag rising inflation risks and recommend caution

Full Details

The Reserve Bank of India is poised to maintain its policy rate in its upcoming decision on April 8, as officials weigh the impact of the Iran conflict on the South Asian economy. RBI Governor Sanjay Malhotra had described India's economy as being in a 'Goldilocks' phase in December—combining strong growth with low inflation—which gave the central bank room to keep policy loose. However, the war in Iran has created an energy-supply shock that threatens to lift price pressures and test that characterization. HSBC chief India economist Pranjul Bhandari warned that if the energy shock lingers, the growth drag could outstrip the price shock, reminiscent of the COVID-19 pandemic economy. J.P. Morgan's chief India economist Sajjid Chinoy noted that rising inflation risks increase conviction that the RBI will keep policy rates firmly on hold. The conflict has already impacted currency and bond markets, with the rupee under pressure and yields rising.