Repo rate unchanged at 5.25% amid oil price shock – Firstpost

The Reserve Bank of India (RBI) on Friday kept the benchmark repo rate unchanged at 5.25 per cent, with the Monetary Policy Committee (MPC) voting to stay on hold as policymakers weighed rising inflation risks from elevated crude oil prices, supply-chain disruptions and geopolitical tensions in West Asia.

The six-member MPC also decided to retain its neutral policy stance, signalling that while inflation risks have increased, the central bank is not yet prepared to shift towards monetary tightening.

Following the policy review, RBI Governor Sanjay Malhotra said the global macroeconomic environment had deteriorated since the central bank’s previous meeting in April, with the lingering conflict in West Asia and its impact on energy markets posing fresh challenges for economies worldwide.

“The adverse implications of the extended disruption in supply chains and elevated energy prices are reflected in the moderation of growth and increase in inflation projections from the April policy,” Malhotra said.

Inflation remains below target, but risks are rising

The governor noted that consumer price inflation has so far remained below the RBI’s 4 per cent target despite the global shock, largely because the pass-through of higher international prices to domestic consumers has been limited.

However, the central bank cautioned that the inflation outlook has become less favourable.

Malhotra said the RBI’s baseline projections indicate that headline inflation could firm towards the upper end of the central bank’s tolerance band during the fourth quarter of the current fiscal year. While policymakers expect the impact of the current supply shock to gradually fade thereafter, they warned that second-round effects remain a significant concern.

“Generalisation of inflation through second-round effects on expectations and wages is a distinct possibility warranting a close vigil,” he said.

The RBI also flagged weather-related risks, including a forecast of a sub-normal southwest monsoon and the possibility of El Nino conditions, as additional threats to food inflation and overall price stability.

Growth remains resilient but headwinds are building

Despite the challenging global backdrop, the central bank said domestic economic activity has remained broadly resilient.

India’s economy grew 7.6 per cent in the last financial year, according to the second advance estimates released by the National Statistical Office (NSO), driven by strong private consumption, fixed investment and robust performance in the manufacturing and services sectors.

The governor said several high-frequency indicators suggest economic activity has remained largely steady even after the outbreak of the conflict in West Asia.

Manufacturing and services Purchasing Managers’ Index (PMI) readings continue to indicate expansion, while business sentiment remains positive.

Private consumption has also remained resilient, supported by discretionary spending, while fixed investment has maintained momentum despite rising input costs. Merchandise exports recorded strong growth in April, providing an additional cushion to economic activity.

However, the RBI acknowledged that elevated energy prices and global supply constraints are beginning to create adverse spillovers for growth.

“There are incipient signs of moderation in some sectors, as suggested by high-frequency indicators,” Malhotra said.

RBI chooses caution over action

The MPC said considerable uncertainty remains over the duration and intensity of the conflict in West Asia, the magnitude of its spillover effects and the pace at which global supply chains normalise.

The committee also cited uncertainty surrounding the monsoon and food-price outlook as reasons for adopting a wait-and-watch approach.

“Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity to emerge,” the governor said.

As a result, the committee unanimously voted to leave interest rates unchanged while retaining the neutral stance.

The RBI emphasised that it would remain data-dependent and continue to closely monitor inflation expectations, supply-side pressures and broader macroeconomic developments before considering any future policy action.

The decision was widely expected by economists and financial markets. However, the central bank’s warning about rising inflation risks, alongside its decision to maintain a neutral stance, suggests policymakers are attempting to balance emerging price pressures against the need to support economic growth amid an increasingly uncertain global environment.