The six-member Monetary Policy Committee (MPC) unanimously retained its wait-and-watch approach amid persistent geopolitical uncertainties, volatile crude oil prices and emerging inflationary pressures.
The committee also kept the Standing Deposit Facility (SDF) rate unchanged at 5%, while the Marginal Standing Facility (MSF) rate and Bank Rate remained at 5.5%.
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The decision, announced by RBI Governor Sanjay Malhotra after the MPC’s three-day meeting, marks another policy review since the RBI’s last rate cut in December last year. While headline inflation has moved above the central bank’s 4% medium-term target, Malhotra said the rise was largely driven by higher fuel prices and that broader price pressures remain contained.
The RBI retained its neutral policy stance, noting that core inflation, excluding precious metals, continues to remain benign. Headline inflation, however, is expected to edge higher in the near term, the governor said.
“The higher inflation is mostly on account of fuel and food with little signs of generalisation of price pressures so far. Core inflation excluding precious metals continues to be benign,” he said. “Headline inflation is expected to rise further in the near term and peak in Q3:2026-27, primarily due to food and fuel, before moderating thereafter.”
It added that “the underlying inflation, reflected by core inflation excluding precious metals, which has been benign for some time, is likely to align with core inflation towards the end of the financial year.”
The RBI projected FY27 real GDP growth at 6.7%, with risks “evenly balanced”, while projecting CPI inflation at 5% for the fiscal year and core inflation at 4.3%.
The central bank had left the repo rate unchanged in June after raising its FY27 retail inflation forecast to 5.1% from 4.6%, citing higher input costs due to the pass-through of elevated global energy prices to petrol and diesel. It had simultaneously lowered its FY27 GDP growth projection to 6.6% from 6.9%.
The central bank’s decision comes even as several Asian peers, including Indonesia and the Philippines, have raised borrowing costs to tackle higher energy prices and currency pressures. Instead of tightening policy, the RBI had announced a series of measures at its previous meeting to attract capital inflows and support the rupee.
Retail inflation rose above the RBI’s 4% target in June for the first time in 17 months, though it remains within the central bank’s 2-6% tolerance band, giving policymakers room to keep rates unchanged. Meanwhile, economic activity has shown some signs of moderation, with the private sector Purchasing Managers’ Index (PMI) slipping to a five-year low in July.
Global uncertainty remains the key concern
The RBI said the global economy continues to face “sharp and frequent market swings, persisting inflation concerns and shifting policy expectations.” It warned that relief from the temporary ceasefire in West Asia had “quickly dissipated amidst resumption of conflict in July,” while “conflict in West Asia, volatile oil prices, sticky inflation expectations, and fragile public finances in systemic economies pose significant downside risks to the outlook.”
Domestically, the central bank said the Indian economy “has remained resilient amidst persisting global headwinds,” with high-frequency indicators pointing to “steady domestic demand” in the first quarter. Private consumption remained robust, investment continued to be resilient, and healthy services exports were complemented by a rebound in merchandise exports.
However, it cautioned that “the turbulent global economic environment is likely to have some bearing on domestic economic activity,” with energy prices and supply chain pressures remaining elevated and uncertain. It also flagged deficient and uneven southwest monsoon under El Niño conditions as a risk to agriculture and rural demand, even as government measures are expected to cushion the impact.
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Summing up its rationale, the MPC said “there is a need for greater clarity to emerge, especially regarding inflation, its path and composition before taking any policy action.” It added that while growth remains resilient, it is expected to be lower this fiscal year and that the outlook remains “hazy because of the uncertainties regarding south-west monsoon, El Niño, geopolitics and global trade policy.”
Analysts had largely pencilled in a pause
Ahead of the policy decision, economists had overwhelmingly expected the MPC to maintain status quo, arguing that global uncertainty and inflation risks outweighed the case for any immediate policy action.
“The credit policy comes at a time when global uncertainty still exists and there is little clarity on when the war will end. Therefore, crude oil prices and currency will remain volatile and rather hard to conjecture,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
“At the same time, we have seen inflation inching upwards and it does look like that it will continue to move in the upward direction as food prices have started rising partly due to the season effects as well as monsoon,” he said.
Sabnavis added, “Growth on the other hand, going by high frequency indicators, is steady. Against this background, the MPC is likely to maintain status quo on repo rate as well as the stance.”
Dipti Deshpande, Senior Director and Principal Economist, Crisil Ltd, also expected policymakers to wait for greater clarity before making any policy move.
“While the MPC may acknowledge emerging inflationary risks, we believe it will prefer to wait for greater clarity on the implications of two key shocks, namely the prolonged conflict in West Asia and ongoing monsoon uncertainties, for the growth-inflation dynamic. Both factors pose risks to the growth and inflation outlook, presenting policymakers with an increasingly delicate trade-off,” Deshpande said.
CareEdge Ratings had also projected no change in the repo rate, saying the central bank would prefer to assess evolving domestic and global developments before taking any fresh policy action.
The agency said geopolitical risks remain elevated due to the unresolved conflict in West Asia, volatile crude oil prices, inflation risks arising from potential El Niño-related disruptions and higher global bond yields. It also said markets would closely watch the RBI’s guidance on liquidity management as sustained foreign capital inflows could leave the banking system with surplus liquidity later in the financial year.