Oil shock, inflation pressures dampen RBI rate-cut hopes

Mumbai: The probability of a further cut in India’s policy interest rates in the current easing cycle has significantly reduced, economists told ET, citing the risks of supply disruptions and oil-fed imported inflation due to the West Asia crisis, and the end to a favourable base effect that had made recent food price increases seem rather modest.

They said the Reserve Bank of India’s move to hit the ‘pause’ button on rates could quickly change if inflation rears its head yet again. Sustained foreign outflows from Indian growth assets and the consequent pummelling of the rupee – on course to be Asia’s worst currency this year, – could force the RBI to act sooner on rates than previously thought.”The chances of a long pause for which the market was preparing before this crisis have certainly diminished. Of course, the RBI would not take the call immediately,” said Indranil Pan, chief economist, Yes Bank. “It is fair to assume that there will be no action in April – or even June – but the chances of a cut are almost non-existent now.”

Global benchmark Brent crude rose to a four year-high of $120 per barrel Monday over concerns of a supply disruption, but has since eased to $90 per barrel after the International Energy Agency announced a historic release of emergency reserves. Prices are still higher than around the $73 per barrel before the US-Israel coalition attacked Iran on February 27.

The Monetary Policy Committee (MPC) would announce its decision on benchmark rates next on April 9. Of course, the latest inflation prints – and broader trends in economic activity – would have a bearing on the rate action, economists said.

The last inflation reading was at 2.75% in January. The February reading will be made public Thursday (March 12). Consumer inflation has trended below the central bank’s price stability mandate of 4% since January 2025, having touched a low of 0.25% in October 2025, mainly helped by a favourable base effect for food prices.But economists are concerned the base-effect impact due previous spikes in inflation would wane soon. When that’s yoked together with the expected supply side disruptions, prices should harden.Moreover, with the central bank already delivering four rate cuts totalling 125 basis points since January 2025 to 5.25%, the room for further reduction is small.

Little Room to Manoeuvre”Besides the inflationary pressures due to the Iran war the banking system itself is not equipped to handle another cut since deposit rates cannot go any lower,” said Madan Sabnavis, chief economist, Bank of Baroda. “Food inflation, which was helped by a base effect, will also not get that benefit starting April. This together with issues linked to LPG supply, airline fares and a possible El Nino condition will lead to higher inflation.”

The World Meteorological Organisation (WMO) has predicted El Nino weather conditions in the second half of 2026, leading to higher temperatures and likely patchy monsoons in India, further affecting food prices.

Sabnavis said he expects inflation will start inching up and go beyond 4% in the first half of next fiscal eliminating any chances of a further rate cut.

Rising oil prices and the risk of widening deficit has also accelerated foreign portfolio outflows from India. So far this calendar foreign funds have pulled out ‘35,808 crore from Indian markets, reflecting in the weakness of the rupee which plunged to an all time low of ‘92.35 per dollar on Monday. A weak rupee means RBI cannot afford to reduce rates further.

“The situation remains fluid. However, the balance of risks has shifted away from an extended pause/ last rate cut to a pause plus hike. It’s premature to pencil in a hike just as of now. But if oil prices remain in USD90-100 a barrel for a year and global rate hikes begin, the MPC might have to consider a hike sooner rather than later for external sector management,” said Anubhuti Sahay, head, India economic research, Standard Chartered.