RBI repo rate: RBI keeps repo rate unchanged at 5.25% as inflation stays contained amid global rate hikes

The Reserve Bank of India (RBI) kept its benchmark repo rate unchanged at 5.25 per cent on Wednesday, opting for caution despite rising global inflation risks and a tightening cycle among several major central banks, while expressing confidence that domestic price pressures remain largely driven by food and fuel rather than becoming broad-based.

The six-member Monetary Policy Committee (MPC) unanimously voted to keep the repo rate unchanged and retained its neutral policy stance, saying it would remain vigilant and respond appropriately to evolving economic conditions.

The decision comes as central banks across Europe, Australia, Indonesia, the Philippines, Singapore, South Korea and South Africa have raised interest rates following higher energy prices triggered by the West Asia conflict. The US Federal Reserve and the Bank of Japan have also kept policy rates unchanged.

Inflation manageable despite crude oil risks

Explaining the MPC’s decision, RBI Governor Sanjay Malhotra said headline inflation has moved above the central bank’s 4 per cent target as expected, but underlying price pressures remain contained.

“The higher inflation is mostly on account of food and fuel, with little signs of generalisation of price pressures so far,” Malhotra said, adding that core inflation excluding precious metals continues to remain benign.

Retail inflation accelerated to 4.4 per cent in June, ending a 16-month period below the RBI’s target. However, the reading was still lower than the central bank had projected earlier. Core inflation excluding food and fuel remained unchanged at 3.9 per cent in May and June, while core inflation excluding precious metals stayed even lower at 2.3-2.5 per cent.

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The RBI now expects headline inflation to rise further in the coming months and peak during the third quarter of the financial year before easing.

At the same time, the central bank lowered its FY27 inflation forecast to 5.0 per cent from 5.1 per cent, citing lower-than-expected inflation in the first quarter despite volatile crude oil prices.

“Although generalised inflation pressures continue to remain modest so far, the risks of second-round impact of higher food, fuel and other input prices translating into broad-based inflation persist,” the Governor warned.

Growth outlook upgraded

Despite global uncertainty, the RBI struck a relatively optimistic note on economic growth.

Malhotra said domestic activity remained resilient, supported by strong manufacturing and services activity, healthy corporate earnings, robust exports and sustained infrastructure spending.

Private consumption also continues to be driven by discretionary spending, while investment activity remains supported by strong capacity utilisation and healthy credit growth, he said.

Reflecting this resilience, the RBI raised its FY27 GDP growth forecast to 6.7 per cent from 6.6 per cent, with quarterly growth projected at 7.0 per cent in Q1, 6.4 per cent in Q2, 6.5 per cent in Q3 and 6.8 per cent in Q4.

However, the central bank cautioned that uncertainties surrounding the southwest monsoon, El Niño conditions, geopolitical tensions and global trade policy continue to pose downside risks.

Why the RBI stayed on hold

Economists had widely expected the RBI to leave rates unchanged. A Reuters poll showed 68 of 72 economists forecasting a status quo.

While wholesale inflation has remained elevated and inflation expectations have increased, policymakers concluded there was insufficient evidence that price pressures had become entrenched.

“There is a need for greater clarity to emerge, especially regarding inflation, its path and composition before taking any policy action,” Malhotra said. “Any such action would also have to consider the need for recalibration of policy rates in line with evolving growth-inflation dynamics.”

Diverging from the global tightening cycle

India’s decision to stay on hold contrasts with several emerging and developed economies that have resumed monetary tightening in response to geopolitical shocks and higher commodity prices.

The RBI has instead relied on measures to attract foreign capital — including incentives for overseas investors and non-resident deposits — to support the rupee, rather than raising interest rates.

The Governor noted that despite a turbulent global environment, India’s external sector has remained resilient. The current account posted a $2.8 billion surplus during April-May, while gross FDI inflows rose to $30.7 billion in the first quarter. Foreign portfolio investment also returned in June and July after outflows earlier in the year.

With inflation still largely driven by supply-side factors and growth remaining resilient, the RBI has chosen to preserve policy flexibility. However, the central bank made it clear that it will closely monitor crude oil prices, inflation expectations and global developments before deciding whether further policy action becomes necessary.