India's central bank is expected to keep interest rates unchanged this week, according to a Reuters poll of economists, diverging from many global peers as inflation remains within its comfort zone despite higher oil prices tied to the ongoing war in the Middle East.

Sixty-eight of 72 economists surveyed by Reuters predicted the Reserve Bank of India's six-member Monetary Policy Committee would hold rates steady on Wednesday, even as it may adopt a more hawkish tone. India, the world's fifth-largest economy and a bellwether for emerging-market investor sentiment, has thus far avoided the tightening wave even as it competes for the same pools of global capital as peers who have moved earlier. The decision would keep India apart from central banks in Europe, Australia, Indonesia, the Philippines, Singapore, South Korea, and South Africa, all of which have raised benchmark borrowing costs since the US-Israeli war on Iran began five months ago. The Federal Reserve and the Bank of Japan have similarly kept rates on hold.

India's divergence keeps the rupee vulnerable, as the currency's recent pressure has been explicitly linked to a lack of widening rate differentials with major economies — an appeal factor for foreign capital that policy measures have not fully offset.

Retail inflation accelerated to 4.38% in June, above the RBI's 4% target for the first time in 17 months, though it remained within the 2%–6% tolerance band the central bank uses to manage short-term supply shocks. Core inflation, which strips out volatile food and fuel prices, has stayed contained near 4%. Food carries an unusually heavy weight in India's consumer price index — roughly 45% of the basket — meaning headline figures can swing sharply on monsoon-driven crop disruptions or global commodity shocks without necessarily signaling demand-driven overheating in the broader economy.

Citi's chief India economist Samiran Chakraborty said that although core and underlying inflation had risen modestly, they remained within the RBI's comfort zone, making a rate hike unlikely in 2026 unless core inflation sustains above 4.5%.

RBI Governor Sanjay Malhotra told the Hindu BusinessLine newspaper last week that signs of higher fuel prices feeding into broader inflation remained limited, though a central bank survey in May showed inflation expectations rising. Wholesale inflation climbed to 9.87% in June.

Tanay Dalal, an economist at Axis Bank, said the Monetary Policy Committee was likely to shift its language to acknowledge risks of firmer inflation and future policy action while maintaining a data-dependent approach, and expected the RBI to retain a neutral stance. Dalal said the pressure visible in wholesale prices was likely to pass through to consumer inflation over a three-to-four-month horizon, adding that while the MPC may be able to look through initial signs of firming inflation, a sustained uptick combined with rising inflation expectations could gradually narrow the central bank's room for flexibility.

Reflecting those expectations, interest-rate swap markets are pricing in roughly 75 basis points of tightening over the next 12 months, suggesting traders anticipate the RBI's flexibility will narrow over time.

The rupee's slide to a record low ahead of June's policy meeting had fuelled calls for a rate hike to defend the currency, a path similar to those taken by Indonesia and the Philippines. Instead, the RBI opted for alternative measures, including scrapping capital-gains tax for foreign holders of Indian government bonds and sweetening dollar deposit schemes for non-resident Indians. These steps attracted nearly $40 billion in inflows and sparked a brief rally in the rupee, though that rally has since faded as renewed hostilities in the Gulf pushed oil prices higher again.

Trinh Nguyen, senior economist for Emerging Asia at Natixis, said the pressure on the rupee would likely persist until the central bank raises rates, since doing so would widen rate differentials with major economies and increase the appeal of Indian assets to foreign investors. Nguyen said that compared with similarly rated markets, India was not the most compelling story from a real yields perspective, adding that while the RBI was unlikely to hike this week, the longer it waited, the more it would ultimately be pushed toward tightening.

The central risk for rupee and rate-sensitive assets is that a delayed hike leaves India more exposed to renewed oil-driven currency pressure in the interim, even as core inflation remains contained for now.