The Reserve Bank of India’s Monetary Policy Committee (MPC) is widely expected to remain in a wait-and-watch mode on June 5 and defer any move to hike interest rates despite mounting inflationary pressures from rising crude oil prices.RBI policymakers face a complex balancing act as the ongoing conflict in West Asia threatens to push up energy costs, disrupt global supply chains, and trigger volatility in financial markets, at a time when sustained capital outflows and pressure on the rupee add to macroeconomic concerns.Against this backdrop, the RBI is likely to reassess both its growth and inflation projections, with risks emanating from elevated oil prices, uncertainty in global trade, adverse weather conditions and geopolitical tensions clouding the economic outlook.No tightening now, but later this year?The RBI had kept the main policy instrument, the repo rate (interest rate at which it lends money to commercial banks), unchanged at 5.25% in the April policy review. In doing so, it underscored a cautious and calculated approach, as economic risks resulting from the West Asia conflict have darkened both global and domestic outlooks.In the absence of a clear risk of headline inflation spilling over into core inflation (a measure that excludes the change in prices of food and fuel) and signs of unanchored inflationary expectations, the central bank is likely to view the energy shock as a supply-side price catalyst. It could defer tightening policy at the upcoming meeting, according to Radhika Rao, Senior Economist and ED, DBS Bank. “An argument can, nonetheless, be made on the need to tighten policy in the second half of calendar year 2026 if the conflict continues, to attract rate-sensitive flows,” Rao said.“Add to this, the inflation rationale has also gained credibility amid successive pump price increases (7% over the past two weeks), a pickup in food, impact of prevailing heatwave conditions and rising business inflation expectations, all of which point to mounting underlying price pressures,” Rao said.Graphs, Data, Perspectives | Inflation vs affordability: Why the two are not the sameCareEdge Rating said it expects the MPC to adopt a wait-and-watch approach amid external volatility, assessing whether current price pressures are transient or persistent, based on external developments. India’s still-benign retail inflation, at 3.48 per cent in April and below the RBI’s 4 per cent medium-term target for more than a year, gives the central bank room to stay on hold rather than rush into policy action.Growth likely to be slashedStory continues below this adEconomic growth in FY27 is expected to remain below the economy’s estimated potential growth rate of 7 per cent, as projected by the Economic Survey. This strengthens the case for the RBI to remain comfortable with a lower real policy rate for the next few quarters, particularly as growth continues to require policy support. Unless there is clear and sustained evidence that higher input costs are feeding into household inflation expectations, the central bank is unlikely to go for a rate hike.The future trajectory of the policy rate will depend on the MPC’s assessment of evolving inflation dynamics, which are significantly influenced by external factors. If conflict persists and inflation risks become entrenched in household expectations, rate hikes could be considered toward the end of the year, CareEdge Rating said.Analysts also expect the MPC to lower growth projections from its earlier projection of 6.9%. “MPC will also remain attentive to growth risks. We project FY27 GDP growth at 6.7%, assuming crude oil averaging $ 90. However, prolonged conflict and oil prices around $ 110 could lower growth closer to 6%,” CareEdge said.It expects Q4 FY26 GDP growth to moderate to around 6.8–7.0%, compared with 7.8% in Q3FY26. Q4FY26 remained partially insulated from the adverse effects of the crisis, as the first two months of the quarter were relatively unaffected.Story continues below this adThe RBI’s Annual Report said the West Asia conflict and risks such as higher energy prices, supply chain disruptions, financial market volatility, global trade uncertainty and weather disruptions could affect growth and inflation in the short term. In a highly uncertain global environment, continuous assessment of the evolving developments is warranted to frame the appropriate policy response on an ongoing basis, the central bank said.Inflation forecast may be revisedThe cumulative increase in retail fuel prices following the conflict in West Asia is estimated to have a direct impact of around 35 bps on headline CPI inflation, which was at 3.48 per cent in April. Indirect inflationary pressures may add another 10–15 basis points to overall CPI inflation. High WPI inflation in April, at 8.3%, increases the risk of faster pass-through to consumers.Considering the higher pass-through of costs to consumers and the impact of El Niño, CareEdge expects CPI inflation in FY27 to average in the range of 4.6–5.0% (assuming Brent oil prices average $90). The RBI is likely to revise its inflation projection upward in line with the projection, CareEdge said.Explained | Why Iran war, monsoon worries could make 2026 India’s Year of MilletsThe MPC is likely to face a difficult policy environment as the situation in West Asia remains volatile, with uncertainty persisting over the durability of the ceasefire. Core inflation (excluding precious metals) has remained benign so far, at 2.1% in April and should also provide reassurance to the MPC. However, core inflation is expected to average around 4.5% in FY27, according to experts.Story continues below this adDespite the recent increase in retail fuel prices by Rs 7.5 per litre, there remains further scope for upward revisions, depending on the trajectory of global crude oil prices.Global comparisonThe latest decision by the US Federal Reserve was at its April 28-29 Federal Open Market Committee (FOMC) meeting, where it kept the federal funds rate unchanged at 3.50-3.75%. The Fed said uncertainty around the economic outlook had increased, partly due to developments in the Middle East.While some central banks have hiked rates recently due to inflationary pressures triggered by the US-Iran conflict, others are deliberating a hike in the near future. In Japan, the Bank of Japan’s new index to measure core inflation edged up to 2.8% in April from 2.5% in March, and above the BoJ’s 2% target. Hawkish comments from BoJ officials recently have raised expectations of a rate hike in June 2026.Reserve Bank of New Zealand kept rates steady, but hinted at future hikes. The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.35% at its May 5 meeting. Bank Indonesia unexpectedly raised its benchmark BI Rate by 50 basis points to 5.25% at its May 19-20, 2026 policy meeting, marking its first rate hike in two years. The central bank of the Philippines (BSP) raised its benchmark interest rate by 25 basis points to 4.50% in April 2026, its first rate hike in more than two years.Story continues below this adA key ECB board member also advocated for a rate hike in the next meeting, amidst inflationary concerns. In May 2026, China kept its benchmark lending rates unchanged for the 12th consecutive month.