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Informist, Wednesday, Mar. 25, 2026

 

By Aaryan Khanna

 

NEW DELHI – Economists acknowledged the impact of the West Asia war on India's inflation may prompt the Reserve Bank of India's Monetary Policy Committee to hike policy rates but diverged on when such an action could take place, largely due to the daily twists and turns in the war. In a worst-case scenario where the war continues through 2026, economists expect the RBI's rate-setting panel to raise the repo rate by up to 50 basis points from the current 5.25% in the current calendar year.

 

"If the war continues throughout 2026, there won't be any rate cut, but we do expect two rate hikes of 50 bps cumulatively during the year," Madhavankutty G., chief economist at Canara Bank, said.

 

Six of the 13 economists and market participants polled by Informist do not expect any change in the repo rate in at least 2026, with a few extending that to all of 2026-27 (Apr-Mar). Two respondents declined to give estimates beyond April, expecting a pause at the rate-setting panel's upcoming meeting in two weeks as policymakers assess the impact of war on the economy, which began when the US and Israel bombed Iran on Feb. 28.

 

The five remaining respondents expect the MPC to hike the repo rate as soon as June to curb inflationary pressures. CPI inflation was expected to rise to around 4% in FY27 even before the war broke out. Should energy prices globally sustain at higher levels for an extended period, with both supply and output severely affected, average inflation may rise to close to 6%, the upper bound of the RBI's tolerance band. 

 

While the memory of the last rate hike cycle in 2022 is fresh in the mind of economists, when a rise in energy prices after Russia's invasion of Ukraine had prompted an off-cycle rate hike, respondents said India's economy is now in a more comfortable position with CPI inflation averaging 1.9% in Apr-Feb per the new series, below the lower end of the RBI's 2-6% tolerance band with 4% as the target. Even with the rise in energy prices in March, retail inflation in FY26 will only average 2.2-2.3%, they said.

 

"RBI is entering FY27 with inflation at the lower end of its target band, averaging a little over 2% in FY26. As such, the MPC has the time to assess the second- and third-order impacts before reacting, unlike in 2022," Sameer Narang, chief economist at ICICI Bank said. "What one can see is acknowledgement of the change in global backdrop and impact of the same on both growth and inflation."

 

The conversation about rate hikes has erupted too soon after the MPC's 125 bps of rate cuts in 2025 and the reason is the surge in crude oil prices, which have quashed hopes of any more rate cuts. Brent crude oil futures peaked at near $120 a barrel this month and consistently trades above the $100 a barrel mark, from around $70 a barrel before the war began. India's crude price basket, a synthetic benchmark with a heavy weightage of Gulf-sourced oil, rose to an all-time high of $157.04 per barrel Monday. It has averaged $123 a barrel so far in March, nearly double from a monthly average of $62-$71 a barrel since April, government data shows. 

 

Though economists do not expect a full pass-through of these into retail inflation or growth, the knock-on impact is already being felt. Oil marketing companies raised domestic liquified petroleum gas cylinder prices by 7% as early as Mar. 7 along with a hike in prices of commercial cooking gas cylinders only a week into the West Asia war. Oil companies last week raised industrial diesel prices by nearly 25% to INR 109.59 a litre. Industrial sales of diesel make up around 13% of all diesel sold in the country, according to Nomura. The government has also curtailed the supply of LPG to industries and commercial establishments, which is likely to impact growth. 

 

"In case the war ends this month, we don't see any change (neither hike nor cut) in benchmark interest rate in 2026," Canara Bank's chief economist said. "If the war continues till the second week of April, we may see a hike in June."

 

The risk of higher imported inflation is not translating only through crude oil prices. The sharp fall of the rupee is also effectively increasing the cost of meeting energy needs from abroad. While inflation itself may not make enough of a case for tighter monetary policy, the need to protect the rupee may also prompt the RBI's three MPC members to vote for rate hikes, Poll respondents said. The domestic unit has fallen 3.3% since the start of the West Asia war to a record closing low of 93.9775 a dollar Wednesday.

 

"We added hikes in Philippines and India (50bp each) - while inflation is within both central banks' target bands, currencies have been under depreciation pressure, and FX pass-through to retail prices is likely to be significant," Goldman Sachs said in a report Tuesday. The US bank has lowered India's growth forecast for 2026 twice since the start of the Iran war, cutting it 110 bps in total to 5.9%.

 

Overnight indexed swap rates, the bellwether for market expectations on India's interest rates, have priced in three repo rate hikes of 25 bps each from the current 5.25% in the next 12 months. The one-year swap rate hit a one-year high of 6.0650% Monday. Some of the pricing has been distorted by hedging activity, though traders said the possibility of rate hikes in India has risen as global central banks may also tighten monetary policy. Bets on the US Federal Open Market Committee hiking interest rates by December have risen to 19%, according to the CME FedWatch tool, reversing from the earlier firm positioning on 50 bps of rate cuts in 2026.

 

The economists in the Informist Poll were much more sanguine on rate actions than interest rate markets even if the war extends.

 

"In our more unfavourable scenario, the energy market disruption is more pronounced and lasts longer. The Brent oil price peaks at US$200 a barrel (bbl)...averaging almost US$130bbl in 2026," S&P Global Ratings said in a report Wednesday. In the base case, it does not expect a rate change by the RBI MPC in FY27. "In India, the central bank would likely tighten policy in response to energy-price inflation, after assessing its persistence. We would expect one 25 bps rate hike in the second half (of 2026)."

 

The respondents to the poll and their interest rate expectations are given below:

 

The respondents to the poll and their interest rate expectations are given below:

 

Institution	Interest rate actions expected
ANZ Bank	No change in foreseeable future
Canara Bank	Rate hike Jun if war continues into Apr; 50 bps hike 2026 if war continues through the year
DBS Bank	No change 2026
Goldman Sachs	50 bps hike 2026
HDFC Bank	Pause Apr; too early to say beyond that
HSBC	No rate hikes in cycle
ICICI Bank	No change in rates immediately
ICICI Securities Primary Dealership	Pause April; no further view right now
IDFC FIRST Bank	No rate change 2026; 25 bps hike Feb at the earliest
Kotak Mahindra Bank	25 bps hike Dec at the earliest
S&P Global Ratings	No change FY27, 25 bps hike in FY28
Standard Chartered	No rate change 2026, 2027
Sundaram Mutual Fund	25 bps hike Feb

 

End

 

US$1 = INR 93.98

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

With inputs from Cassandra Carvalho, Shweta and Shubham Rana

Edited by xx

 

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