'Vigilance & flexibility: RBI's message as inflation, crude risks loom'

Looking ahead, investors will continue to track crude oil prices, inflation trends, monsoon developments, and geopolitical events, said Somil Mehta of Mirae Asset Sharekhan

The Reserve Bank of India (RBI) maintained the status quo in its latest monetary policy meeting by unanimously keeping the repo rate unchanged at 5.25 per cent and retaining its neutral policy stance. The decision reflects the central bank’s cautious approach at a time when global economic uncertainties have increased significantly. 

The RBI highlighted that the global environment has deteriorated due to the prolonged conflict in West Asia, elevated crude oil prices, supply-chain disruptions, and heightened financial market volatility. These developments have created challenges for economies across the world, including India, by increasing inflationary pressures and impacting growth prospects. 

Acknowledging these risks, the RBI revised its inflation forecast for FY27 upwards by 50 basis points (bps) to 5.1 per cent. The central bank cited higher energy prices, supply disruptions, weak global demand, and the possibility of a weak monsoon as key factors contributing to inflation risks. At the same time, the RBI lowered its gross domestic product (GDP) growth forecast for FY27 by 30 bps to 6.6 per cent, indicating that economic activity may moderate amid a challenging external environment. 

One of the key highlights of the policy was the RBI’s focus on maintaining currency stability and attracting foreign capital. The central bank announced a series of measures to support the rupee, including allowing foreign portfolio investors to participate in longer-duration government securities under the fully accessible route (FAR), providing hedging cost support for foreign currency non-resident (FCNR) deposits, and offering concessional swap facilities for external commercial borrowings by public sector entities. In addition, the government’s decision to remove withholding tax on interest earned by foreign investors on government securities is expected to improve the attractiveness of Indian debt markets.  READ | Higher FY27 inflation target signals rate hikes to come later: Vijayakumar 

The policy demonstrates the RBI’s balancing act between controlling inflation, supporting growth, and maintaining financial stability. By keeping rates unchanged, the central bank has avoided putting additional pressure on economic growth while continuing to closely monitor inflation trends. The neutral stance also provides flexibility to respond to evolving economic conditions. 

From a market perspective, the policy is broadly positive for the banking and financial sectors. Stable interest rates support credit growth and borrowing activity, while measures aimed at attracting foreign capital could help strengthen liquidity and support the rupee. Public sector undertaking (PSU) banks and non-banking financial companies (NBFCs) are likely to benefit from a stable rate environment and potential improvement in foreign currency deposit inflows. 

Looking ahead, investors will continue to track crude oil prices, inflation trends, monsoon developments, and geopolitical events. While the RBI has chosen to remain patient for now, a sustained rise in inflation could increase the likelihood of a policy rate hike in the coming quarters. For now, the central bank’s message is clear: vigilance and flexibility remain essential in navigating an increasingly uncertain global environment. 

(Disclaimer: This article is by Somil Mehta, head of retail research, Mirae Asset Sharekhan. Views expressed are his own.)