Radhika Rao: Tensions hold Indian rates, rupee weak
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- Radhika Rao said the US‑Israel military operation against Iran, which began on 28 February, has spooked financial markets and global trade by extending attacks to Gulf energy infrastructure.
- RBI’s monetary policy committee lowered benchmark rates in 2025 using the real‑rate buffer and now expects a prolonged pause beyond December 2025, citing Middle‑East tensions and pipeline‑inflationary pressure as reasons to keep rates unchanged.
- The rupee had already slipped to fresh lows before the conflict, driven by a stronger US dollar and risk aversion, and the ongoing war is expected to add imported price pressures through higher crude prices and retail fuel adjustments.
- India’s diversification strategy, including a pending trade deal with the United States, is portrayed as essential to reach a $10 trillion economy and to mitigate exposure to geopolitical shocks.
- IEEPA court ruling will not halt the US‑India trade deal, according to Rao, who expects better market access for Indian labour‑intensive exporters and deeper tech collaboration in aerospace, defence, AI and clean energy.
- Radhika Rao highlighted that despite short‑term inflationary risks from higher industrial raw‑material costs, the Indian economy’s structural strengths—capital spending, growth in semiconductors, renewables and defence manufacturing—remain intact.
- Radhika Rao said the rupee internationalisation plan will be expedited through trade settlements to lower volatility from USD‑based FX channels.
Why it matters: The RBI’s decision to hold rates steady amid rising crude prices shields inflation expectations but leaves import‑dependent firms and consumers facing higher fuel and raw‑material costs, while India’s push for diversification and a US trade pact opens new export markets and tech collaborations.
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