What Happened
- SBI Research has projected the RBI's Monetary Policy Committee will maintain the policy repo rate at 5.25 percent at its April 6–8 meeting, marking the first formal policy review since the US-Iran war began on February 28, 2026
- The war — which began with coordinated US-Israeli airstrikes on Iranian nuclear and military infrastructure — has triggered the effective closure of the Strait of Hormuz to general shipping, producing the largest disruption to global energy markets since the 1973 Arab oil embargo
- The RBI is expected to tread cautiously in its communication given the "volatile and evolving backdrop," avoiding strong forward guidance that could be quickly overtaken by events
- Key data points driving caution: crude above $100/barrel, imported inflation at 5.4%, CPI likely exceeding 4.5% for multiple quarters, and the rupee under pressure
- The RBI may deploy non-rate policy instruments — particularly "Operation Twist" — to flatten the yield curve and manage bond market stress without changing the headline rate
- This is Governor Sanjay Malhotra's first major policy test since taking charge, with analysts watching closely for signals on the rate path for the rest of FY27
Static Topic Bridges
Operation Twist: A Non-Rate Monetary Policy Tool
Operation Twist is an unconventional monetary policy tool where a central bank simultaneously purchases long-term government securities and sells short-term government securities of equivalent value. The net effect is to flatten the yield curve — long-term yields fall (good for infrastructure and housing borrowers) while short-term yields rise or stay stable. The operation does not change the overnight policy rate or inject or drain net liquidity from the system. The US Federal Reserve famously used Operation Twist in the 1960s and revived it in 2011. The RBI deployed it in late 2019 and again during the COVID-19 period to lower long-term borrowing costs for the government and corporates.
- Effect: Long-term bond yields fall → cheaper long-duration borrowing for government, infrastructure, housing
- Net liquidity: neutral (simultaneous buy + sell)
- Contrast with OMO (Open Market Operations): OMOs are outright purchases/sales that change net liquidity
- RBI's previous Operation Twist: December 2019 onwards, again in 2020-21 during COVID fiscal expansion
- The yield curve: typically upward sloping (long rates > short rates); steepening signals inflation concerns; flattening signals easing
- Why it matters now: If the RBI cannot cut rates (due to inflation), Operation Twist lets it ease long-term conditions without the inflation signal of a repo cut
Connection to this news: The RBI is expected to use Operation Twist precisely because the West Asia conflict creates conditions where long-term yields might spike (fiscal concerns, inflation) but the RBI cannot cut rates to control them — Operation Twist is the targeted tool for this scenario.
India's Fiscal-Monetary Policy Interface During External Shocks
External shocks — like oil price surges — create a tension between fiscal policy (government's budget management) and monetary policy (RBI's rate management). Fiscally, the government may want to increase subsidies (for LPG, fertilisers) or reduce fuel excise taxes to shield consumers, but this widens the fiscal deficit. Monetarily, the RBI may want to cut rates to support growth, but rising import costs and currency depreciation make this inflationary. The two levers can work at cross-purposes: loose fiscal policy (more borrowing, higher deficit) puts upward pressure on bond yields, which the RBI may need to address through Operations Twist or OMOs. This coordination challenge is acute in India because both the government and RBI are responding to the same shock.
- India's fiscal deficit target for FY27: approximately 4.4% of GDP (Union Budget 2026-27)
- Oil subsidy/excise adjustment: each ₹1/litre reduction in petrol excise costs ~₹14,000 crore in revenue
- Higher fiscal deficit → more government bond supply → upward pressure on yields
- RBI bond purchase (OMO/Twist) can offset yield pressure, but limits RBI's inflation-fighting credibility
- The RBI Act prohibits direct monetisation of deficit (printing money) — borrowing is through market mechanism
- "Fiscal dominance" risk: if fiscal policy is too expansionary, it undermines monetary policy effectiveness
Connection to this news: The RBI's cautious communication at the April MPC is partly about managing this fiscal-monetary tension — a rate hold avoids signalling that monetary policy will simply accommodate fiscal expansion driven by the oil shock.
Global Energy Markets and India's Strategic Petroleum Reserve
India's Strategic Petroleum Reserves (SPRs) are government-managed underground storage facilities designed to provide emergency oil supply in case of market disruptions. Managed by the Indian Strategic Petroleum Reserves Limited (ISPRL), they are located at Visakhapatnam (1.33 million tonnes), Mangaluru (1.5 million tonnes), and Padur (2.5 million tonnes) — total capacity of 5.33 million tonnes, covering approximately 9.5 days of India's crude consumption. Following the 2026 Hormuz crisis, India has been drawing on commercial stocks and evaluating SPR drawdown options to bridge supply gaps.
- SPR total capacity: 5.33 million tonnes at three locations (Visakhapatnam, Mangaluru, Padur)
- Coverage: approximately 9.5 days of India's crude consumption
- Managed by: Indian Strategic Petroleum Reserves Limited (ISPRL), under Ministry of Petroleum
- India has proposed expanding SPR capacity with private sector participation and overseas storage
- IEA members typically hold 90 days of import cover as SPR; India is not an IEA member but cooperates with it
- The IEA coordinated a global SPR release during 2022 (Russia-Ukraine conflict) — similar coordination may be sought in 2026
Connection to this news: The RBI's monetary policy hold is being complemented by supply-side government actions including potential SPR drawdown, illustrating how fiscal/supply-side tools must compensate when monetary policy cannot ease.
Key Facts & Data
- Repo rate: 5.25% (expected unchanged, April 6–8, 2026 MPC meeting)
- Crude oil: above $100/barrel following effective Hormuz closure
- Imported inflation: 5.4% (SBI Research data)
- FII outflows in FY26: $16.6 billion — highest since 1991
- India's SPR capacity: 5.33 million tonnes (~9.5 days of crude consumption)
- SPR locations: Visakhapatnam (1.33 MT), Mangaluru (1.5 MT), Padur (2.5 MT)
- The Hormuz disruption has been called the largest global oil market disruption since 1973
- RBI tools under consideration: Operation Twist (yield curve management), OMOs (liquidity)