India's central bank kept interest rates unchanged on Wednesday as it waits to see whether volatile oil prices caused by the Iran war feed wider inflationary pressures.
The Reserve Bank of India (RBI) said the benchmark repurchase rate, the level at which it lends to commercial banks, would remain at 5.25% after a unanimous vote by a six-member panel.
Emerging and frontier market central banks from Indonesia to Sri Lanka have raised rates to curb price rises and boost their currencies since the outbreak of the Middle East crisis in February.
Limited and staggered fuel price hikes by the Indian government have so far shielded citizens from the worst of the war's economic impact but there are signs that this may not hold.
Retail inflation rose to 4.4% in June — breaching the central bank's medium target of 4% for the first time in 17 months — though it remains within RBI's 2-6% tolerance band.
Bank governor Sanjay Malhotra said economic growth was supported by "resilient domestic demand" and inflation was not "broad-based" yet.
"The MPC (Monetary Policy Committee) noted that even though headline inflation is projected to increase, it is primarily on account of supply side pressures caused by food and fuel. It is not getting broad-based," Malhotra said in a televised address from the financial capital Mumbai. "There is a need for greater clarity to emerge, especially regarding inflation, its path and composition before taking any policy action."
Analysts said Malhotra's speech had a dovish tinge.
"What stood out just as much as the tone itself was what was missing from it," Sneha Pandey of Quantum AMC said.
With the war still unresolved and already influencing both oil markets and yields, there were ample reasons for the central bank to express greater concern, she said. "It didn't... and that comfort is a genuine positive for equities."
Adding to the central bank's calculations is pressure on the Indian rupee, which slid to a record low before its June policy meeting.
Instead of raising rates, the RBI chose to announce a range of moves aimed at wooing dollar inflows, including a deposit scheme for the Indian diaspora.
These measures have brought in more than $40bn since June, according to central bank data released last Saturday, boosting the RBI's forex buffers.
While the steps have helped stop the rupee's losses, the currency has faced fresh challenges.
India, the world's third-largest buyer of oil, normally sources about half of its crude through the Strait of Hormuz, which has been effectively closed since the beginning of the war in February.
Analysts say this makes New Delhi among the most vulnerable economies to a global energy shock, as higher crude and fertiliser prices drive up India's import bill.
