The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on Friday kept the policy repo rate unchanged at 5.25%, while retaining its neutral stance, signalling a wait-and-watch approach amid heightened global uncertainty.
Explaining the decision, RBI Governor Sanjay Malhotra said the MPC believed significant risks to both inflation and growth remained.
“The MPC was of the opinion that there are considerable risks to the baseline assessment of inflation and growth arising from uncertainty over the duration and intensity of the conflict, the magnitude of spillover effects, and the pace of supply-chain normalisation,” he said.
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Malhotra also flagged uncertainty over the food inflation outlook due to forecasts of a sub-normal southwest monsoon and the possibility of El Niño conditions. “Although risks to inflation have increased, the MPC felt it would be prudent to wait for greater clarity to emerge,” he said.
At the post-policy press conference, however, the governor acknowledged that the probability of a rate hike had risen. “The case for a rate hike is more adverse than it was previously,” he said.
The MPC noted that domestic demand remains resilient and activity in both manufacturing and services continues to expand, though some high-frequency indicators suggest a slowdown in parts of the economy.
Reflecting the evolving macroeconomic landscape, the RBI lowered its real GDP growth forecast for 2026-27 to 6.6% from 6.9% projected in the April policy review, citing elevated energy prices, supply-chain disruptions and weaker global demand. At the same time, it raised its CPI inflation forecast for the fiscal year to 5.1% from 4.6%, factoring in the pass-through of higher crude oil prices and other input costs.
“The fourth-quarter GDP growth came in higher than expected, supported by robust private consumption and investment. Going ahead, however, we remain wary of geopolitical risks and El Niño-led supply-side shocks,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
Inflation pressures intensify
“Tighter financial conditions, higher inflation and a weak monsoon could weigh on both urban and rural demand. We expect GDP growth to remain in the 6-6.3% range, depending on how these risks evolve,” she added.
The MPC observed that while headline inflation remains below the 4% target at present, upside risks have intensified because of rising energy prices, supply-chain disruptions, a weaker monsoon outlook and the possibility of El Niño conditions. It cautioned that persistent cost pressures could trigger second-round effects on inflation expectations and wages.
Malhotra said a deficient monsoon could affect rural demand and private consumption, although comfortable foodgrain stocks and adequate reservoir levels provide some cushion.
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According to Ranen Banerjee, partner and leader, economic advisory, PwC India, the RBI’s inflation trajectory leaves little room for complacency.
Rate outlook turns cautious
“The inflation projection of 5.9% for the third quarter is close to the upper limit of the RBI’s tolerance band. If inflation evolves in line with these projections and upside risks persist, the MPC could alter its stance at the next meeting and potentially consider a rate hike in December,” he said.
Given the uncertainty surrounding geopolitical tensions and their economic fallout, the MPC said it would remain data-dependent and closely monitor incoming inflation and growth data before taking further policy action.
On the financial sector, Malhotra said banking system indicators remain healthy despite some moderation in profitability from last year’s levels. He added that system-wide indicators for non-bank lenders are also robust, supported by adequate capital buffers and improving asset quality.
TOPICSCPI InflationEl NinoRBIRBI Monetary Policy ReviewRepo Rate + 0 MoreThis article was first uploaded on June six, twenty twenty-six, at thirty-four minutes past six in the morning. © The Indian Express (P) Ltd