Signage for the Reserve Bank of India (RBI) in Mumbai, India, on Friday, April 5, 2024.
Dhiraj Singh | Bloomberg | Getty Images
India’s central bank on Wednesday held benchmark interest rates at 5.25% as strong growth allows it room to keep policy tight at a time when the Iran war has raised inflation risk.
Economists polled by Reuters had forecast the policy rate to remain unchanged.
The monetary policy committee thinks the intensity and the duration of the conflict, along with the resulting damage to the energy and other infrastructure, pose a “risk to the [India’s] inflation and growth,” Reserve Bank of India Governor Sanjay Malhotra said in his statement.
India’s consumer inflation rose for a fourth straight month to 3.21% in February, up from 2.75% in the prior month. While the country has seen sharp growth, expanding at a faster-than-expected 7.8% in the December quarter, the Iran war threatens to slow growth.
India’s Chief Economic Advisor V. Anantha Nageswaran last month had also warned that growth forecast of 7.0%–7.4% for the financial year ending March 2027 faces “considerable downside” risk due to rising energy costs and supply‑chain disruptions linked to the Iran war.
Nageswaran said the Middle East conflict would disrupt supplies of key commodities such as oil, gas, and fertilizers, push up import prices, and raise logistics costs, which would have an impact on both growth and inflation.
The conflict, which began on Feb. 28 following U.S. and Israeli strikes on Iran, has disrupted movement of goods through the Strait of Hormuz — a critical waterway carrying 20% of global oil — driving up energy and freight costs and straining supply chains.
In a temporary relief, U.S. and Iran agreed to a ceasefire earlier in the day, with Tehran saying that safe passage of ships was “possible” for the next two weeks in coordination with the country’s armed forces.
Signaling growth worries, HSBC flash Purchasing Managers’ Index compiled by S&P Global showed that India’s private sector activity in March slowed to its lowest level since October 2022. Companies surveyed indicated that the Middle East war, unstable market conditions, and inflationary pressures had “dampened growth.”
