As Reserve Bank of India Governor Sanjay Malhotra prepares to announce the monetary policy on Wednesday (April 8), the economic backdrop has shifted dramatically since the February 2026 review: the West Asia conflict has clouded the economic horizon. Rising crude oil prices and raging conflict now pose fresh challenges, with the potential to push up inflation and place corporate earnings and overall growth under strain due to rising input costs, supply disruption and shortage of raw materials in several sectors.Given the uncertain economic situation, the Monetary Policy Committee (MPC) of the RBI is expected to keep interest rates unchanged for now, analysts say. It will likely take a cautious approach and wait for more data before making any big decisions. However, it may revise its outlook by lowering growth expectations and raising its inflation forecast due to ongoing price pressures and supply issues.Analysts and economists do not expect the MPC to hike the Repo rate as retail inflation is still under control. A status quo on the policy rate would provide a major relief to borrowers as their equated monthly instalments (EMIs) on home, vehicle, personal corporate and small business loans are unlikely to change.After the 25 basis points cut in December, the MPC unanimously decided to hold the repo rate – the key policy rate – unchanged at 5.25 per cent in the February policy review.“In the context of the stagflationary shock and exogenous nature of the event risk, we expect the RBI to keep rates on hold in April, while addressing specific pockets of strain. We expect a change in the policy stance towards tightness if there are material spillover risks on core inflation and potential second round effects,” said Radhika Rao, Senior Economist, DBS Bank.Also in Explained | RBI’s ban on speculative games in rupee through NDD, amid pressures on rupee“The RBI is likely to announce its full year growth and inflation forecasts keeping in view the impact of war on India. The RBI will remain vigilant and hold rates steady for the time being, without changing its stance from neutral,” said Sonal Badhan, Economist, Bank of Baroda. “We also believe this to be the end of the rate cut cycle. Further, if oil prices remain above US$ 100 per barrel for a consistently long period of time and inflation breaches the upper tolerance band of RBI (6%), then there might be a chance of rate hike by the central bank towards the end of FY27.”Growth, inflation forecasts to be revisedRao said the bank has revised upwards FY27 inflation forecast to 4.6% from previous 4.0%, with an upside risk of 50-60 basis points if crude stays north of $110 this quarter and next. Real GDP growth forecast has been trimmed to 6.5% from the previous forecast of 7.0% for FY27 as higher inflation will lift the nominal pace but impinge on the real growth rate. We foresee additional if the conflict prolongs or energy prices stay high.Story continues below this adA wider energy import bill and subdued demand for goods exports can widen the current account deficit to -1.8% of GDP against the baseline -1.3% of GDP, Rao said. Higher current account deficit combined with subdued capital flows outlook, pave the way for a third consecutive balance of payments deficit (in FY27 after FY25- FY26 deficits) – a first for the economy, DBS said. The rupee will be vulnerable to further near-term weakness against this backdrop.Domestic inflation is coming off a low starting point base, with FY26 average at 2.0-2.2%, suggesting there is more cushion to absorb the risk of fuel price hikes in FY27, without posing material risk to the upper bound of the target range at 6%. “With this shock being primarily supply-driven and likely transient, monetary policy might be a blunt and potentially ineffective tool in the short term to arrest inflationary expectations,” Rao said.If the ongoing energy shock persists for a few more weeks, the growth drag could begin to outweigh the inflation shock. “This time, it is not just higher oil prices, but also quantity constraints across energy sources, amplified by quota systems and cascading into downstream sectors. Linear sensitivities from past oil shocks likely underestimate the growth hit. If this persists, it may start to resemble the pandemic more than the 2022 oil shock,” said Pranjul Bhandari, Chief India Economist, HSBC Global Investment Research.The RBI lifted its FY26 GDP forecast to 7.4% from an earlier estimate of 7.3% in the February policy review. It also revised upward the projection for consumer price index (CPI) inflation to 2.1% from 2%.What has changed?Story continues below this adThe spike in oil prices has led to stress in the financial markets, rise in bond yields and a 2.34 per cent currency depreciation since the war started. Reflecting these risks, implied rates have risen sharply as investors factor in the risk of a tighter policy stance. Yield on benchmark 10-year bond has crossed the 7 per cent mark amid inflation worries.Globally, a lot has changed since the RBI announced its last policy in February 2026. The crisis in the Middle East has become a point of concern. Energy infrastructure of major oil exporting economies has been damaged. The Strait of Hormuz is virtually closed. Oil prices continue to hover above $ 100 per barrel and global central banks are preparing for its impact on inflation.Also Read | RBI holds interest rates steady: What drove the decision?The escalation of the US–Iran conflict has triggered a shortage and spike in LPG prices, leading to broad-based input cost inflation across consumption sectors. Given the high linkage of crude derivatives to packaging, logistics and raw materials, the situation is expected to compress margins, delay demand recovery, and disrupt supply chains, says an Axis Securities report.Foreign investors have pulled out Rs 1.37 lakh crore from the Indian markets in March and April so far, contributing to a decline in foreign exchange reserves. Since the onset of the conflict, India’s forex reserves have reportedly dropped by nearly $40 billion.Story continues below this adThe policy outlook will, nonetheless, shift from a “benign inflation–strong growth” scenario to a more “cautious balancing act”, where the central bank may need to respond to renewed inflationary pressures while sustaining growth, according to Rao.Markets to watch guidance of MPC, GovernorAs the ongoing conflict in West Asia continues to disrupt global supply chains, shortages of critical inputs and rising uncertainty in international markets have heightened concerns among policymakers and industry stakeholders alike. In this context, the guidance and policy stance of the Governor and the MPC are set to be closely scrutinised, particularly with regard to their assessment of the inflation trajectory.Economists and market participants will be watching for signals on how the central bank intends to balance the twin challenges of sustaining economic growth while containing inflationary pressures. Supply-side constraints, coupled with volatile commodity prices, are likely to complicate the inflation outlook, potentially influencing the trajectory of interest rates in the coming months.Against this backdrop, the central bank’s communication and policy measures will play a critical role in anchoring market expectations and ensuring financial stability amid an increasingly uncertain global environment.