Why India's Central Bank Isn't Moving While Everyone Else Is

India's central bank held rates at 5.25% for the fourth straight meeting this week while conflict in Iran drives energy costs higher and most of Asia is tightening. That's a choice, not an oversight. Governor Sanjay Malhotra said growth is resilient and underlying inflation pressures are muted, which sounds pretty calm for someone watching a war unfold in a region that supplies 90% of India's crude oil.

The Reserve Bank of India's six-member committee voted unanimously to hold, kept the neutral stance, and basically told the market they're waiting for more clarity before they touch anything. Meanwhile Japan, Australia, and Indonesia have all moved to tighten. India's sitting this one out.

Here's what the RBI is watching. India imports roughly 90% of its crude oil, so when Iran conflict pushes energy prices up, that matters. But so far inflation is still inside the 2%-6% target band. June's number breached the 4% midpoint for the first time in 17 months, but the RBI's viewing that as temporary supply shock, not broad-based price pressure.

Malhotra said headline inflation will probably rise in the near term and peak in Q3, driven mostly by food and fuel. The finance ministry warned last week that inflation is broadening beyond food, and India's largest consumer goods companies are prepping a second round of price hikes to pass on higher input costs. Rainfall is deficient in parts of the country, and area planted with key crops like rice and pulses is lagging last year's levels. Food is the biggest piece of India's CPI.

So the risks are real. The RBI just doesn't think they're systemic yet.

Short-end bonds rallied harder than long-end after the announcement. Five-year yields dropped 8 basis points while 10-year yields fell 3 basis points. That's the market pricing in that Malhotra isn't absorbing liquidity and isn't signaling a hike anytime soon.

Before Wednesday, the market was pricing 100% odds of a rate increase at the October meeting. After Malhotra's statement, that dropped to 65%. That's a big shift. The neutral tone and lack of any liquidity absorption talk basically told traders the RBI has room to wait.

Economists are split. Barclays, Nomura, and Emkay expect the RBI to hold through year-end. ANZ, Kotak Mahindra, and Bank of America expect some tightening by December. The dividing line is whether you think the inflation data coming next week changes the picture or just confirms what the RBI already knows.

India's economy grew 7.8% in the January-March quarter, which keeps it among the fastest-growing major economies globally. The RBI nudged its full-year GDP forecast up slightly to 6.7% from 6.6% for the year ending March 2027. That's not a huge revision, but it's in the right direction.

Gross domestic product data comes out August 31st, before the RBI's October review. If growth holds at this pace and inflation doesn't blow out, the case for holding rates stays intact. If inflation broadens and growth softens, the calculus changes fast.

Malhotra said the RBI is data dependent, which is central banker speak for "we're not committed to anything." Nomura's chief economist Sonal Varma thinks the RBI's inflation forecasts are still on the high side and will get revised down at the next meeting. That would tilt things toward holding longer.

The rupee is one of Asia's worst-performing currencies this year despite the RBI bringing in more than $40 billion in foreign-currency inflows since June. Those measures helped cushion the decline, but pressure is probably going to persist as long as geopolitical tensions keep the dollar strong.

Malhotra got asked why the rupee hasn't appreciated much given the capital inflow efforts. He didn't really answer that directly. He said the currency may strengthen going forward as geopolitical uncertainties ease, which is the kind of thing you say when you don't want to commit to a timeline.

If the rupee keeps weakening, that adds imported inflation risk on top of the energy exposure. But for now the RBI seems comfortable that inflows are enough to manage the currency without tightening policy.

Inflation data for July drops next Wednesday. That's the first major input before the October meeting. The RBI lowered its full-year inflation forecast slightly to 5% from 5.1%, so they're not expecting a blowout, but June's breach of the 4% target means the next few months matter.

If food and fuel costs stay elevated and the finance ministry's warning about broadening inflation proves accurate, the market's 65% odds of an October hike could flip back to 100% pretty quick. If inflation moderates and growth stays strong, the RBI gets to keep sitting on the sidelines while everyone else deals with tightening into a global slowdown.

The other piece is what happens with the Iran conflict. If energy prices spike hard enough to push inflation sustainably above target, monetary policy has to respond even if the RBI views it as a supply shock. But Malhotra's tone suggests they think India can absorb this without panicking, which is either confidence in the data or optimism that geopolitics will calm down before inflation forces their hand.

Either way, the RBI's holding pattern is a bet that the current inflation pressure is temporary and growth can handle it. That works until it doesn't.