RBI holds rates, flags Q3 inflation spike
Mumbai: The Reserve Bank of India (RBI) kept its benchmark policy rate unchanged for a fourth consecutive meeting on Wednesday, with the Monetary Policy Committee (MPC) unanimously retaining the repo rate at 5.25 per cent and the policy stance at neutral, as it awaits greater clarity on inflation risks from higher energy costs linked to the Iran war.
Governor Sanjay Malhotra said headline inflation is expected to rise in the near term and peak in the third quarter of 2026-27, driven largely by food and fuel prices, before moderating. However, he said inflation pressures had not become broad-based, with core inflation, excluding precious metals, remaining benign.
The RBI raised its growth forecast for 2026-27 marginally to 6.7 per cent from 6.6 per cent, citing resilient domestic demand, manufacturing and services activity and strong exports despite heightened global uncertainty from the West Asia conflict and trade tensions.
It lowered its headline inflation forecast to 5 per cent from 5.1 per cent, while cutting its core inflation projection to 4.3 per cent from 4.7 per cent.
Malhotra reiterated the RBI’s “resolute” commitment to bringing inflation in line with its target, signalling there was no urgency to tighten monetary policy. However, he flagged risks from a weak southwest monsoon, El Nino conditions, geopolitical tensions and global trade policy.
“Global economic conditions and sentiments continue to remain hostage to the rapidly oscillating developments” in the West Asia conflict, Malhotra said, adding that stronger macroeconomic fundamentals were helping India navigate the shock.
The RBI said system liquidity remained in surplus and it would continue two-way liquidity operations to ensure adequate liquidity and keep the weighted average call rate aligned with the repo rate.
On the external sector, Malhotra said the current account remained resilient, supported by strong services exports and remittances. FDI inflows remained robust, while foreign portfolio flows turned positive in June and July following measures to attract capital into Indian debt markets. Forex reserves stood at $692.9 billion as of July 31.
Economist Upasna Bhardwaj of Kotak Mahindra Bank said the status quo was in line with expectations but saw scope for 50 basis points of rate hikes in the second half of FY27, as inflation could remain above 5 per cent in the first quarter of FY28.
The RBI also proposed measures for cooperative banks, including draft guidelines to resume licensing of urban cooperative banks and revised directions for credit monitoring of rural cooperative banks. It also proposed standardising rules governing interest rates on advances across regulated entities to improve transparency and consumer protection.