The RBI’s MPC kept the policy repo rate unchanged at 5.25%, maintaining a neutral policy stance and adopting a wait-and-watch approach amid the evolving Middle East conflict. The MPC assessed that the ongoing conflict’s intensity and duration pose risks to both economic growth and inflation, with the initial supply shock potentially evolving into a demand shock if supply chain disruptions persist. However, India’s stronger macroeconomic fundamentals provide greater resilience than in past episodes.

The RBI’s first full-year FY27 projections (assuming crude oil price at ~$85/bbl) place real GDP growth at 6.9% (with downside risks) and CPI inflation at 4.6% (with upside risks), broadly consistent with our projections of ~7.0% and ~4.3%, respectively. On the geopolitical front, the US and Iran agreed to a two-week ceasefire, triggering a sharp fall in crude oil prices and a market relief rally. While this is positive, the path forward remains uncertain. The ceasefire must progress toward a durable agreement and translate into actual normalisation in the Strait of Hormuz for the outlook to improve.