Cautious status quo: RBI sees higher inflation, slower growth in FY27

The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) has left the policy repo rate unchanged at 5.25 per cemt for a third consecutive meeting, citing mounting global uncertainties, including the absence of a peace deal between the US and Iran. The central bank struck a cautious note, reiterating that future policy moves would remain dependent on incoming data. 

The decision to hold rates was unanimous. The MPC also retained the neutral stance on policy. 

“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,” said RBI Governor Sanjay Malhotra while announcing the policy decision. 

International crude oil prices surged above $100 a barrel after the start of war in West Asia in late February. While prices have eased somewhat since then, they remain above pre-conflict levels. 

Against this backdrop, the central bank has cut its FY27 real GDP growth forecast to 6.6 per cent, from 6.9 per cent projected in April. The CPI inflation forecast was raised to 5.1 per cent from 4.6 per cent, while the core inflation projection was revised up to 4.7 per cent from 4.4 per cent. 

Notably, the inflation forecast for the October-December quarter has been raised to 5.9 per cent, close to the upper tolerance limit of 6 per cent, from 5.2 per cent projected in April. The revised projections are based on an assumed average crude oil price of $95 a barrel, compared with $85 in April. 

Malhotra said domestic fuel prices at pumps had begun rising from May and that increases in the prices of several inputs, including commercial LPG, would exert upward pressure on consumer inflation in the coming months. 

 However, the MPC judged it prudent to wait for greater clarity before taking further action. “The MPC will continue to remain data-dependent and closely monitor developments, including the risk of supply-side pressures becoming embedded in the general price level and inflation expectations,” said Malhotra. 

Markets interpreted the commentary as cautious, with many expecting the central bank to remain on hold through 2026. “The (RBI) governor’s address and policy statement repeatedly highlighted the uncertain global environment, in terms of duration, extent and spillovers from the conflict,” said economists at Barclays in a report. 

“The MPC’s pause today was guided by the need to wait for greater clarity to emerge on growth and inflation risks,” they said, adding that they expect the RBI to remain on hold through 2026 before delivering a cumulative 50 basis points of rate hikes in calendar year 2027. 

Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said: “We continue to believe that growth considerations could outweigh expectations of a more aggressive rate-hike cycle.” 

“We believe the RBI will continue to look through inflation prints before taking a considered call on any potential rate hike,” said Ghosh, adding that SBI expects another pause at the next policy meeting scheduled for August 3-5. 

On the external sector, Malhotra said the surge in energy prices and persistent trade policy uncertainties continued to pose upside risks to India’s current account deficit in 2026-27. “Services trade surplus and inward remittances are expected to provide some comfort,” he said. 

The RBI also announced a slew of measures aimed at attracting foreign inflows to help bridge the balance of payments deficit.

Reiterating that the RBI’s exchange-rate policy remains unchanged and does not target any specific level or band, Malhotra said the currency market could at times witness movements driven by speculative pressures, particularly during periods of heightened uncertainty, that are not aligned with underlying fundamentals and could disrupt economic activity.  “While our objective is not to resist market-driven adjustments, we will curb excessive volatility and prevent disorderly market movements,” he added.