The Reserve Bank of India (RBI) held its key interest rate steady at 5.25% on Friday. This decision comes as surging global energy costs batter the Indian currency and the conflict in Iran risks accelerating inflation.

The central bank revised its inflation forecast for the fiscal year ending March 2027 upward by 50 basis points to 5.1%. Concurrently, it lowered its economic growth projection from a previously estimated 6.9% down to 6.6%.

In a statement, RBI Governor Sanjay Malhotra noted that "monetary policy has become more cautious" as the persistent Middle East "geopolitical stalemate" clouds the global economic outlook. He added that "soaring energy prices and disruptions to global supply chains continue to hinder economic activity."

The conflict in the Middle East poses a significant threat to India's economy. Disruptions in energy supplies have caused the country's import bill to surge, intensifying pressure on the rupee, which was already reeling from record foreign investor outflows.

In an effort to support the rupee, Prime Minister Narendra Modi last month urged citizens to temporarily halt gold purchases, conserve fuel, and avoid foreign travel.

Policymakers have also taken steps to defend the currency. These include selling U.S. dollars through state-owned banks to curb its depreciation. The government has additionally raised tariffs on gold to dampen demand, a move aimed at protecting foreign exchange reserves.

Despite these measures, the Indian rupee remains weak. According to LSEG data, the rupee has depreciated by over 6% against the U.S. dollar so far this year.

With the conflict in Iran slowing India's economic growth and inflation risks looming, the RBI faces a difficult balancing act. In April, even before the government approved fuel price increases, India's inflation rate rose for a sixth consecutive month, climbing to 3.48% from 3.40% in March.

Although the current inflation rate remains below the RBI's 4% target, India is expected to face weather-related disruptions this year due to the El Niño phenomenon. This could lead to crop shortages and drive up food prices. Food inflation is a major component of India's Consumer Price Index, and it increased to 4.2% in April from 3.87% in March.