RBI leaves interest rates unchanged, lowers inflation forecast

The Reserve Bank of India (RBI) kept its benchmark policy rate unchanged for a fourth consecutive meeting on Wednesday, choosing to wait for greater clarity on whether higher energy costs triggered by the Iran war feed into broader inflationary pressures.

The six-member Monetary Policy Committee (MPC), headed by governor Sanjay Malhotra, unanimously voted to keep the policy repo rate unchanged at 5.25 per cent while retaining its “neutral” policy stance.

The decision leaves India diverging from a growing number of regional central banks, including Indonesia and the Philippines, which have tightened monetary policy in response to higher energy prices and war-driven currency volatility. Instead, the RBI has relied on measures announced at its previous policy meeting to attract capital inflows and support the rupee.

Announcing the decision, Malhotra said headline inflation is expected to rise in the near term and peak in the third quarter of 2026-27, largely because of food and fuel prices, before moderating.

He said inflationary pressures have not become broad-based, with core inflation, excluding precious metals, remaining benign.

Signalling there was no urgency to tighten monetary policy, Malhotra reiterated the RBI’s “resolute” commitment to bringing inflation in line with its target while waiting for greater clarity on the inflation outlook.

The RBI projected consumer price inflation at 5 per cent for the current 2026-27 financial year, compared with the 5.1 per cent forecast in June. It also lowered its projection for core inflation, which excludes food and fuel, to 4.3 per cent from 4.7 per cent.

The central bank marginally raised its economic growth forecast for the current financial year to 6.7 per cent from the 6.6 per cent projected in June. It said domestic growth remained resilient, supported by robust domestic demand, manufacturing and services activity, and strong exports despite heightened global uncertainty stemming from the West Asia conflict and trade tensions.

However, the RBI warned that the outlook remains uncertain because of risks from the southwest monsoon, El Nino conditions, geopolitical developments and global trade policy.

While high-frequency indicators present a mixed picture, with manufacturing activity slowing and bank credit growth remaining close to 18 per cent, the RBI said domestic demand continued to be resilient.

Malhotra, however, cautioned that a weak monsoon, trade uncertainty and geopolitical tensions remained key risks to the growth outlook.

“Global economic conditions and sentiments continue to remain hostage to the rapidly oscillating developments, both in scale and intensity, of the West Asia conflict. While these have impacted the domestic growth-inflation outlook adversely, the stronger macroeconomic fundamentals of the Indian economy are helping navigate this global shock resolutely,” he said.

He added that this presents an opportunity to accelerate measures to enhance resilience against such shocks.

“We shall continue to implement policies that further fortify our economy. Whether it is facilitating sustainable growth or promoting consumer protection; whether it is preserving stability of prices, the financial system or the currency, we will do whatever it takes to ensure the same.”

Commenting on the MPC’s decision, Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, said:

“RBI’s decision of status quo has been in line with expectations. The tone has been well balanced, highlighting the risks and hence the policy decisions ahead being data dependent. We continue to see scope for 50 bp of rate hike in 2HFY27 (second half of current fiscal), especially as 1QFY28 inflation also continues to look above 5 per cent.”

The central bank said system liquidity remained in surplus and that it would continue conducting two-way liquidity operations to ensure adequate liquidity in the banking system and align the weighted average call rate with the policy repo rate.

On the external sector, Malhotra said India’s current account remained resilient despite global turbulence, supported by strong services exports and remittance inflows. Foreign direct investment inflows remained robust, while foreign portfolio flows turned positive in June and July following measures to attract capital into Indian debt markets. Foreign exchange reserves stood at USD 692.9 billion as of July 31.

The RBI also announced additional measures for the cooperative banking sector, including draft guidelines to resume licensing of urban cooperative banks and revised draft directions for the Credit Monitoring Arrangement for rural cooperative banks.

To improve transparency and consumer protection, the central bank proposed harmonising and standardising the regulatory framework governing interest rates on advances across all regulated entities.