India central bank holds rates at 5.25% amid oil shock

India's central bank kept its benchmark interest rate at 5.25% on Wednesday, choosing to wait for clearer signs of whether volatile oil prices linked to the Iran war will spread into wider inflation pressure.

The Reserve Bank of India said its Monetary Policy Committee voted unanimously to leave the repurchase rate unchanged. Retail inflation rose to 4.4% in June, above the RBI's 4% medium-term target for the first time in 17 months, but still inside its 2%-6% tolerance band.

RBI governor Sanjay Malhotra said domestic demand remained resilient and inflation was not yet broad-based. He said projected rises in headline inflation were mainly due to food and fuel supply pressures, and that policymakers needed more clarity on inflation's path and composition before acting.

The decision comes as emerging and frontier market central banks, including those in Indonesia and Sri Lanka, have raised rates since the Middle East crisis began in February.

Pressure on the rupee is also part of the RBI's calculations. The currency slid to a record low before the June policy meeting, when the RBI instead announced measures aimed at attracting dollar inflows, including a deposit scheme for the Indian diaspora. Central bank data released last Saturday showed those measures had brought in more than $40 billion since June, strengthening foreign-exchange buffers.

India is the world's third-largest buyer of oil and normally sources about half of its crude through the Strait of Hormuz, which has been effectively closed since the war began in February. Analysts say that makes New Delhi among the economies most vulnerable to a global energy shock, as higher crude and fertiliser prices increase the import bill.

Sneha Pandey of Quantum AMC said Malhotra's statement had a dovish tone because it did not express greater concern about the unresolved war's effect on oil markets and yields. She said that was positive for equities.