Signage for the Reserve Bank of India (RBI) in Mumbai, India, on Friday, April 5, 2024.\u00a0<\/p>\n
Dhiraj Singh | Bloomberg | Getty Images<\/p>\n
India’s central bank on Wednesday held benchmark interest rates at 5.25%, warning that the Iran war had raised inflation worries while also flagging risks to economic growth.<\/p>\n
Economists polled by Reuters had forecast the policy rate to remain unchanged.<\/p>\n
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.<\/p>\n
The RBI lowered India’s real GDP growth<\/a> for April-June quarter to 6.8% from 6.9% and for July-September quarter to 6.7% from 7.0% forecast earlier<\/a>. <\/p>\n “Elevated energy and other commodity prices coupled with supply shock due to disruptions in the Strait of Hormuz” would weigh on domestic production in the financial year ending March 2027, Malhotra said.<\/p>\n India’s consumer inflation rose for a fourth straight month to 3.21% in February, up from 2.75% in the prior month. Malhotra said that the country’s food price outlook remained “comfortable in the near term,” while adding that the jump in energy prices due to the Middle East conflict risk to inflation.<\/p>\n While the country has seen sharp growth and continues to be the world’s fastest growing large economy, expanding at a higher-than-expected 7.8% in the quarter ended December, Iran war worries loom large on the economy. <\/p>\n India’s Chief Economic Advisor\u00a0V. Anantha Nageswaran last month had also warned that growth forecast of 7.0%\u20137.4% for the financial year ending March 2027\u00a0faces “considerable downside” risk<\/a>\u00a0due to rising energy costs and supply\u2011chain disruptions linked to the war.<\/p>\n 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.<\/p>\n The conflict, which began on Feb. 28 following U.S. and Israeli strikes on Iran, has disrupted movement of goods through the\u00a0Strait of Hormuz<\/a>\u00a0\u2014 a critical waterway carrying 20% of global oil \u2014 driving up energy and freight costs and straining supply chains.<\/p>\n In a temporary relief, U.S. and Iran agreed to a ceasefire<\/a> 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. <\/p>\n 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<\/a> since October 2022. Companies surveyed indicated that the Middle East war, unstable market conditions, and inflationary pressures had “dampened growth.” <\/p>\n Even if oil prices stay elevated, inflation is unlikely to cross above 6%, but “downside risks to growth” are more significant, said Anubhuti Sahay,\u00a0head of India economics research at Standard Chartered Bank, adding that a rate increase seems unlikely. <\/p>\n However, she said that in a scenario where other central banks raise key policy rates, and there is “tremendous pressure on the rupee,” then the RBI could “use policy rates as a tool to manage external sector risk.”<\/p>\n