RBI Keeps Repo Rate Unchanged at 5.25% Amid Rising Global Risks
1. MPC
Maintains Status Quo
·
The
Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged at 5.25%.
·
The neutral policy stance
was also retained.
·
The
decision was taken at the MPC meeting held from June 3-5, 2026, chaired by Sanjay Malhotra.
2. Other
Policy Rates Unchanged
·
Standing
Deposit Facility (SDF) Rate:
5.00%
·
Marginal
Standing Facility (MSF) Rate:
5.50%
·
Bank
Rate: 5.50%
3. Global
Environment Remains Challenging
·
The
prolonged West Asia conflict has increased risks to both global growth and
inflation.
·
Energy
markets remain volatile, with:
o Rising crude oil prices.
o Declining oil reserves.
o Firming commodity prices.
·
Major
advanced economy central banks may shift toward tighter monetary policies.
4. Domestic
Economy Remains Resilient
·
India's
economic activity has remained largely stable despite geopolitical disruptions.
·
Key
growth drivers include:
o Resilient private consumption.
o Strong investment activity.
o Robust services exports.
o Growth in merchandise exports.
5. Emerging
Economic Pressures
·
Rising
energy and commodity prices are increasing production and transportation costs.
·
Supply-chain
disruptions continue to affect businesses.
·
Higher
freight and insurance costs are impacting exports.
6. Monsoon
and Agriculture Risks
·
The
south-west monsoon is expected to be deficient.
·
Risks
from El Niño could affect:
o Agricultural output.
o Rural demand.
·
Government
initiatives on water conservation, crop diversification, and climate-resilient
agriculture are expected to mitigate some risks.
7. GDP Growth
Forecast for FY 2026-27
·
RBI
projects real GDP growth
at 6.6% for 2026-27.
·
Quarterly
projections:
o Q1: 6.6%
o Q2: 6.3%
o Q3: 6.5%
o Q4: 6.8%
8. Downside Risks to Growth
·
Prolonged
global supply-chain disruptions.
·
Volatility
in global financial markets.
·
Weather-related
shocks and weak global demand.
9. Inflation Trending Higher
·
Headline
CPI inflation rose to:
o 3.4% in March 2026.
o 3.5% in April 2026.
·
Higher
food prices were the primary driver.
10. Fuel Price Increases to Push Inflation Up
·
Since
May 2026:
o Petrol prices increased by 7.4%.
o Diesel prices increased by 8.4%.
·
The
direct impact on inflation is estimated at around 36 basis points, with
further second-round effects likely.
11. Input Cost Pressures Building
·
Higher
global energy prices are raising costs for:
o Commercial LPG.
o Chemicals.
o Industrial raw materials.
o Rubber and plastic products.
·
These
increases may eventually pass through to consumer prices.
12. Inflation Forecast Raised
·
RBI
projects CPI inflation at
5.1% for 2026-27.
·
Quarterly
projections:
o Q1: 4.2%
o Q2: 5.1%
o Q3: 5.9%
o Q4: 5.4%
13. Core Inflation Outlook
·
Core
inflation is projected at 4.7%
for 2026-27.
·
Excluding
precious metals, inflationary pressures remain relatively subdued, indicating
limited demand-side pressures.
14. Government Measures Supporting Resilience
·
Support
for MSMEs and exporters.
·
Efforts
to increase domestic crude oil and gas supplies.
·
Promotion
of domestic substitutes for imported inputs.
·
Diversification
of critical imports.
15. Why RBI Chose to Pause
·
Inflation
remains below the RBI's target threshold despite rising global pressures.
·
Growth
remains resilient but faces emerging headwinds.
·
The
MPC believes it is prudent to wait for greater clarity on:
o The duration of the West Asia conflict.
o Supply-chain normalization.
o Monsoon performance.
o Inflation pass-through effects.
16. Future Policy Approach
·
RBI
will remain data-dependent
and closely monitor:
o Inflation expectations.
o Wage pressures.
o Supply-side shocks.
o Global developments.
17. Next MPC Meeting
·
The
next Monetary Policy Committee meeting is scheduled for August 3-5, 2026.
·
MPC
meeting minutes will be released on June
19, 2026.
Key Takeaway
The RBI has opted to
keep the repo rate unchanged at 5.25% and retain a neutral stance, balancing
rising inflation risks from higher energy prices and global disruptions against
a still-resilient domestic economy. While GDP growth is projected at 6.6% for
FY 2026-27, inflation is expected to rise to 5.1%, prompting the central bank
to adopt a cautious wait-and-watch approach.
Monetary Policy Statement, 2026-27 Resolution of the Monetary Policy
Committee June 3 to 5, 2026
Monetary
Policy Decisions
The
Monetary Policy Committee (MPC) held its 61st meeting from June 3 to 5, 2026,
under the chairmanship of Sanjay Malhotra, Governor, Reserve Bank of India. The
MPC members Dr. Nagesh Kumar, Saugata Bhattacharya, Prof. Ram Singh, Dr. Poonam
Gupta and Indranil Bhattacharyya attended the meeting.
2. After
a detailed assessment of the evolving macroeconomic and financial developments
and the outlook, the MPC voted unanimously to keep the policy repo rate under
the liquidity adjustment facility (LAF) unchanged at 5.25 per cent.
Consequently, the standing deposit facility (SDF) rate remains at 5.00 per cent
and the marginal standing facility (MSF) rate and the Bank Rate remain at 5.50
per cent. The MPC also decided to continue with the neutral stance.
Growth
and Inflation Outlook
Global
Outlook
3. As the
West Asia conflict prolongs without any meaningful resolution in sight, risks
to both inflation and growth have increased. Energy markets have been volatile;
crude oil reserves are declining and global commodity prices have firmed up.
Faced with difficult trade-offs, monetary policy has turned more cautious.
Major advanced economy central banks are likely to pivot towards monetary
policy tightening. Global financial markets have shown mixed trends, with
equities remaining buoyant driven by AI optimism, while sovereign bond yields
have hardened on fiscal sustainability concerns and inflation worries. The US
dollar index has appreciated recently amid shifting rate expectations and
changing risk sentiment.
Domestic
Outlook
4. As per
several high frequency indicators, domestic economic activity remained largely
steady since the outbreak of the conflict. Private consumption has been
resilient, while fixed investment maintained its momentum despite cost
pressures. Merchandise exports recorded strong growth in April 2026, though
elevated freight and insurance costs remain a drag. Services exports continued
to be robust. While the economy has withstood the conflict spillovers with
limited impact so far; the strains are increasingly becoming visible.
5.
Looking ahead, elevated energy and other commodity prices coupled with
continued supply disruptions are likely to affect economic activity. While
import diversification in affected commodities has helped in improving supply,
it comes at a higher cost. The full impact, however, will depend on the
duration of the conflict, time taken for normalisation of supply chains and the
burden-sharing approach among the stakeholders. The south-west monsoon is
expected to be deficient, with implications for agricultural activity and rural
demand. However, the programmes and initiatives for crop diversification, water
harvesting and conservation, climate-resilient practices and short-duration
crops, among others, are expected to mitigate the impact. Furthermore, sustained
momentum in services, continuing impact of GST rationalisation, and broadly
stable employment conditions should continue to support urban consumption.
Strong capacity utilisation, sustained credit flows from bank and non-bank
sources, and the government’s capex are expected to support investment
activity. While weak global demand and elevated freight and insurance costs are
headwinds for merchandise exports, services exports are expected to remain
steady.
6.
Several measures undertaken by the Government, including support to MSME and
export sectors, efforts to ramp up domestic gas and crude supplies, encouraging
use of domestically produced alternatives to imported inputs, and
diversification of critical imports have strengthened the economy’s resilience
to cope with external shocks.
7. Taking
all these factors into consideration, real GDP growth for 2026-27 is projected
at 6.6 per cent, with Q1 at 6.6 per cent; Q2 at 6.3 per cent; Q3 at 6.5 per
cent; and Q4 at 6.8 per cent (Chart 1).
Prolonged global supply chain disruptions, heightened volatility in global
financial markets, and weather-related shocks continue to pose downside risks
to the domestic growth outlook.
8.
Headline CPI inflation inched up to 3.4 per cent in March and 3.5 per cent in
April 2026 primarily due to higher food inflation. Fuel inflation remained
modest as retail fuel prices largely remained unchanged in March and April
despite the sharp spike in international energy prices. Core (CPI excluding
food and fuel) inflation remained unchanged at 3.7 per cent during January to
April. Excluding precious metals, core inflation remained much lower at 2.1-2.2
per cent. This indicates that the input cost pressures, as reflected in a sharp
increase in April WPI, have not yet fully manifested in CPI.
9. Since
May, however, retail fuel prices have been raised cumulatively by 7.4 per cent
for petrol and 8.4 per cent for diesel. The increase implies a direct impact of
about 36 basis points on headline inflation, which, along with second order
effects, would get reflected in CPI inflation in the coming months.
Pass-through of higher global energy prices are also visible in several other
inputs such as commercial LPG, industrial raw materials, chemicals, rubber and
plastic products. The second-round impact of higher input costs could exert
upside pressure on CPI inflation going forward.
10.
Considering all these factors, CPI inflation for 2026-27 is projected to be 5.1
per cent with Q1 at 4.2 per cent; Q2 at 5.1 per cent; Q3 at 5.9 per cent; and
Q4 at 5.4 per cent. Core inflation is projected at 4.7 per cent for 2026-27 (Chart 2).
Excluding precious metals, core inflation is projected to be lower, suggesting
that demand pressures remain contained. These forecasts are subject to upside
risks due to global supply chain disruptions and uncertainty about the spatial
and temporal distribution of monsoon. However, adequate stock of foodgrains and
satisfactory reservoir levels provide some comfort.
Rationale
for Monetary Policy Decisions
11. The
global environment has deteriorated since the last policy meeting with the
conflict lingering amidst a fragile truce. 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 as discussed above.
12. CPI
inflation remains below the target despite the global shock as the passthrough
to domestic prices has been limited. While the baseline projections point
towards headline inflation firming up towards the upper tolerance level in
Q3:2026-27, the impact of the supply shock is expected to wane Q4 onwards. The
underlying inflation pressures continue to remain benign at this juncture.
However, generalisation of inflation through second-round effects on
expectations and wages is a distinct possibility, warranting a close vigil. The
outlook also remains clouded by the sub-normal south-west monsoon forecast and
El Niño risks.
13. As
for growth, elevated energy prices coupled with global supply constraints are
having adverse spillovers on economic activity. While domestic demand remains
resilient and manufacturing and services sectors activity continue to expand,
there are incipient signs of moderation in some sectors as suggested by high
frequency indicators.
14. As
discussed above, there are considerable risks to the MPC’s baseline assessment
of inflation and growth due to the uncertainty about the duration and intensity
of the conflict, magnitude of its spillover effects and the pace of restoration
of supply chains. Additionally, the food outlook remains uncertain on account
of the sub-normal south-west monsoon forecast and El Niño. Although risks of
higher inflation have amplified, the MPC felt it would be prudent to wait for
greater clarity to emerge. Accordingly, the MPC voted to keep the policy rate
unchanged. At the same time, the MPC will continue to remain data-dependent and
closely monitor the developments, including supply side pressures getting
embedded in the general price level and inflation expectations. The MPC also
decided to retain the neutral stance.
15. The
minutes of the MPC’s meeting will be published on June 19, 2026.
16. The
next meeting of the MPC is scheduled for August 3 to 5, 2026.