The Reserve Bank of India will announce its next monetary policy on April 9. While every meeting of the Monetary Policy Committee (MPC) draws close scrutiny, this one comes at a particularly critical juncture because of the conflict in West Asia. Even if the MPC leaves the policy rate unchanged, its communication will be crucial in calming financial markets amid heightened uncertainty. Markets will look for clear guidance on how the MPC interprets the uncertainty and what it implies for the future course of monetary policy.
In inflation-targeting economies such as India, communication is a key instrument of monetary policy. Financial markets analyse MPC statements and the governor’s remarks for signals about the future path of interest rates. When central bank communication becomes complex or ambiguous, market volatility tends to rise (Sengupta and Mathur, 2019). This matters even more in periods of uncertainty, when investors and firms struggle to form clear expectations about the economic outlook.
Two main sources of uncertainty will shape the backdrop to the MPC’s decision in the coming weeks.
The first is the war in West Asia. Until recently, India’s macroeconomic conditions appeared stable, with strong growth and moderate inflation. That stability has quickly eroded.
The conflict has disrupted supplies of key commodities such as crude oil, natural gas, and fertilisers. India imports nearly 90 per cent of its crude oil, about half of its natural gas, and roughly a quarter to a third of its fertiliser needs, much of it from West Asia. Prolonged disruptions could push up domestic energy and fertiliser prices and eventually feed into food prices and headline inflation.
Inflation had already begun to edge up even before these shocks. The consumer price index-based inflation rose to 3.2 per cent in February, a nine-month high. Although still below the RBI’s 4 per cent target, the margin for comfort has narrowed compared with June 2025 to January 2026, when inflation averaged about 1.5 per cent.
At the same time, disruptions to global trade routes could hurt exports and production, given that West Asia accounts for roughly 15 per cent of India’s exports. Higher energy costs may further weaken output and growth. Supply shortages often force adjustments that compress demand. The government has asked domestic gas producers to divert supplies towards households, reducing availability for industries such as plastics, chemicals, fertilisers and aluminium. Restaurants and other service sectors that rely on gas may face higher costs and weaker sales. Rising jet fuel prices are also pushing up airfares, which could dampen travel and tourism demand.
This creates a policy dilemma for the MPC. Should it prioritise containing inflation and adopt a more hawkish stance, or support growth as uncertainty rises? The committee will also need to clarify whether the recent increase in inflationary pressures is likely to be temporary or could it generate second-round effects that require a policy response. Markets will look for clarity on how the MPC balances these risks, without which, uncertainty about the policy outlook will persist.
It is also worth noting that even though the RBI reduced the repo rate by a cumulative 125 basis points in 2025 to support growth, long-term bond yields have not fallen. The yield on the 10-year government security has risen to around 6.75-6.80 per cent, close to levels seen before the rate-cutting cycle began. Normally, bond yields decline when policy rates fall. This divergence reflects rising uncertainty in financial markets. A clear articulation of the MPC’s assessment of macroeconomic risks could help stabilise expectations and prevent further increases in yields during this volatile period.
The second source of uncertainty is the new CPI index introduced in February. The revision changes both the weightings assigned to items and the composition of the consumption basket, which has expanded from 299 to 358 items. The weight of food has fallen sharply from about 46 per cent to around 37 per cent. Within food, the share of volatile items such as cereals has declined, while relatively stable components such as protein-rich foods have gained importance. A lower food weight may make headline inflation less sensitive to temporary supply shocks, such as monsoon variability. If inflation becomes less volatile, monetary policy could also become more predictable.
But the implications are not automatic. Markets will want to understand how the MPC interprets the new index. Does the change in weightings alter its assessment of inflation dynamics? Will food shocks play a smaller role in policy decisions? Could the behaviour of core (non-food, non-fuel) inflation change? Clear communication on these questions will help stabilise expectations as the new CPI becomes the basis for monetary policy.
As the MPC prepares its April 9 statement, clarity of communication will matter as much as the policy decision itself. Minimising surprises and setting clear expectations will help ensure monetary policy remains effective in the volatile months ahead.
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