Monetary policy April 2026 – A blueprint to tackle collateral risks 

Amid potential collateral risks from the ongoing West Asia conflict, the RBI, while keeping the repo rate intact at 5.5 percent, flagged comprehensive upside risks to inflation and growth dynamics. While the domestic economy is currently sounding resilient, it cannot escape the onslaught of crises that can trigger inflation and slow down the economy. 

The global economy is now battered by the war’s impact, and no economy can escape its wrath. The energy crisis is escalating, trade costs are surging, insurance costs are rising, and the proposed toll for the passage of trade ships through the Strait of Hormuz will strain economies, even if passage is allowed, threatening the inflation trajectory. 

In addition, the impending El Niño is another looming threat that could exacerbate climate risks, triggering a domino effect across many sectors. The compounded effects of these collateral risks can be painful for ordinary people in many countries.  Amid these adversities, the script of the monetary policy correctly flags the impending pass-through effects of the war and opts to keep the policy rate unchanged while maintaining the ‘neutral’ stance, keeping options open to act appropriately whenever needed.  

Since the last MPC meeting, system liquidity, measured by the net position under the Liquidity Adjustment Facility (LAF), has averaged a surplus of Rs. 2.3 lakh crore. Throughout this period, the weighted average call rate (WACR) traded mostly in the lower half of the corridor, except near the end of March, suggesting a comfortable liquidity position. 

Short-term money market rates, particularly for commercial papers and certificates of deposit, stayed high. G-Sec yields mostly stayed within a range with a slight downward tendency in February, but increased later due to the ongoing conflict. The RBI assured that ample liquidity would be supplied to maintain steady fund flow to the productive sectors of the economy. 

• Impact of the West Asia crisis: 

Though high-frequency indicators up to February 2026 reflect the resilience of the economy, the geopolitical crisis and armed conflict in the West Asia region are set to disrupt the momentum of growth. The threats of global slowdown and surge in inflation will pose risks to the domestic economy in many ways. Imported inflation, higher energy prices, as crude prices surge from US $ 70 to US $ 100, having touched the US $ 139 per barrel level many times during the 40 days of war. Elevated energy prices will push up commodity prices, mostly affecting the grocery bills of common people, and disruptions to trade routes could disrupt supply chains. Many units may not receive the supplies in time or in adequate measure. 

The Government has, however, been proactive in ensuring the supply of inputs across critical sectors by creating buffers to minimize the impact of supply chain disruptions; how long this can continue is to be assessed. Taking all these impending risk factors into consideration, real GDP growth for 2026-27 is projected at 6.9 percent, with Q1 at 6.8 percent, Q2 at 6.7 percent, Q3 at 7.0 percent, and Q4 at 7.2 percent. 

The base year of GDP computation having been changed to 2022-23, the real GDP for 2025-26 is now estimated at 7.6 percent and GVA at 7.7 percent. The World Bank has lowered its GDP growth outlook on India for FY27 to 6.6 percent, down from 7.2 percent. Similarly, Goldman Sachs moderated its outlook to 5.9 percent, down from 6.5 percent, and Nomura brought down its outlook to 7 percent. The moderating GDP outlook is unanimous among them; only the expected GDP levels differ. 

In January-February, headline inflation remained below the target (2.7% and 3.2%), but rising risks are emerging amid ongoing crises and their ripple effects. Based on current conditions, CPI inflation for 2026-27 is forecasted at 4.6%, with quarterly estimates of 4.0%, 4.4%, 5.2%, and 4.7%. Core inflation is expected to be 4.4%. Despite these new challenges, the RBI remains committed to maintaining inflation near the lower end of the target glide path through consistent monitoring, control measures, and interventions.  

System liquidity, indicated by the net position under the Liquidity Adjustment Facility (LAF), has averaged a daily surplus of Rs. 2.3 lakh crore since the last MPC meeting. During this period, the weighted average call rate (WACR) traded mostly in the lower half of the corridor, except near the end of March, confirming that liquidity risks remained at a manageable level. 

The overall flow of resources from both bank and non-bank sources to the commercial sector reached Rs. 40.4 lakh crore, an increase from Rs. 32.2 lakh crore in the same period of the previous year. The main contributors to this growth were higher flows from non-food bank credit, totaling Rs. 6.9 lakh crore, and corporate bond issuances by non-financial entities, amounting to Rs. 1.7 lakh crore. Bank credit saw a year-on-year growth of 13.8 percent as of the fortnight ending March 15, 2026, compared to 11.0 percent a year earlier. Since May 2025, year-on-year credit growth has been on an upward trend. However, the deposit growth of 10.8% continues to lag behind the credit growth, posing liquidity risks. 

Other fundamental banking metrics remained stable and strong. The system-level Capital to Risk-Weighted Assets Ratio (CRAR) was 16.91 percent in December 2025, comfortably above the regulatory minimum. The non-performing loan ratio improved further, with GNPA at 1.89 percent in December 2025, compared to 2.42 percent in December 2024, and NNPA at 0.44 percent, versus 0.55 percent. Liquidity buffers stayed solid, with an LCR of 125.85 percent at the end of December 2025. The annualized return on assets (RoA) was 1.32 percent, while the return on equity (RoE) reached 12.95 percent in December 2025. The Net Interest Margin was 3.28 percent, down slightly from 3.49 percent in December 2024.

With these strengths and RBI’s liquidity support, banks and non-banks can continue to ensure the flow of credit to the commercial sector, providing well-aligned handholding to help them navigate the current wave of unprecedented stress. 

Through timely articulation of regulatory measures, RBI created some elbowroom for ease of business, targeted at vulnerable MSMEs, enabled quarterly profit flows to strengthen banks’ capital adequacy ratios, and removed the need for the Investment Fluctuation Reserve (IFR) because it is already cushioned by mark-to-market to manage market risks.   

In the ongoing embroglio, the RBI’s actions are well aligned with its vision, risk assessment, and calibrated support, alerting not only regulated entities but also businesses at large, which are pillars of the economy. 

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